The reconstitution of the BSE BANKEX index came into effect on December 26, marking a significant expansion in the banking sector representation. Four new banking entities have been added to strengthen the index composition and align with current market dynamics.

New Banking Stock Additions

The latest reshuffle introduces four prominent banking institutions to the BSE BANKEX index:

No exclusions were made during this reshuffle, bringing the total number of constituents to 14. The index now features a revamped weighting structure that caps the top three stocks at 45%, ensuring better diversification across the banking sector.

Strategic Index Restructuring

This update follows an earlier announcement by BSE Index Services detailing revisions across multiple indices, including BSE SENSEX, BSE 100, and BSE SENSEX 50. The inclusion of fresh constituents represents part of a broader index restructuring initiative aimed at realigning composition based on prevailing market dynamics and eligibility criteria.

BSE MD and CEO Sundararaman Ramamurthy previously stated that the exchange is focused on making BANKEX a prominent product by promoting monthly derivatives. The exchange aims to expand monthly derivative offerings with plans to roll out additional products expected to be economically meaningful for the broader market.

Derivatives Segment Performance

BSE has witnessed significant traction in the derivatives segment, particularly since the relaunch of SENSEX derivatives in May 2023. The performance metrics demonstrate strong market acceptance:

According to Motilal Oswal data, these figures reflect BSE's growing competitiveness against NSE's Nifty in the derivatives space. BSE's SENSEX derivatives currently maintain a 99.90% correlation with Nifty, indicating strong product reliability.

Market Outlook and Strategic Positioning

Strategic moves including product introductions, switching expiry days, and deepening index product maturity have contributed to BSE's momentum. Brokerage firm B&K Securities noted that the focus on expanding trading in longer-dated contracts and increasing engagement on non-expiry days aligns with BSE's objective of broadening market depth and improving premium quality.

Swarnabha Mukherjee of B&K Securities emphasized that BSE remains well-positioned to maintain steady growth and market share accretion in the index options space. The market share gains have been driven by new product introductions like SENSEX and BANKEX contracts, strategic switching of expiry days, and focus on deepening SENSEX product maturity.

The index revision and product developments form part of BSE's strategy to sustain its position in the index options space, particularly targeting the FY26-28 window. Incrementally, the exchange expects onboarding of more clients and members, with scale-up in the colocation business to aid derivatives volume growth and premium quality enhancement.

Smaller stocks have significantly underperformed their larger counterparts in 2025, with elevated valuations and profit-booking pressures weighing on investor sentiment. Market analysts attributed this divergence to a natural correction following exceptional outperformance in the previous two years, combined with global uncertainties that favored blue-chip stocks.

Market Performance Comparison

The performance gap between different market segments has been stark in 2025. Till December 24, the BSE smallcap index declined by 6.68%, while the midcap gauge managed only a marginal gain of 0.77%. This contrasted sharply with the 30-share BSE Sensex, which jumped 9.30% during the same period.

Factors Behind Underperformance

Several key factors contributed to the shift in investor preference:

• Valuation concerns: Elevated pricing levels in smaller stocks triggered profit-booking
• Global uncertainty: Investors shifted focus toward largecap stocks with stronger balance sheets
• Funding sensitivity: Smallcap and midcap companies faced higher volatility due to sensitivity to funding costs and margin pressures
• Currency depreciation: Rupee weakness amid US-India trade negotiation concerns
• Foreign outflows: Persistent FII selling pressure on broader market segments

Historical Performance Context

The recent underperformance stands in contrast to the rally witnessed in previous years. In 2023-24, the BSE smallcap index delivered returns of over 29%, while the midcap index gained 26%, outperforming the Sensex.

Market Dynamics and Investor Behavior

Market experts noted that when markets undergo time correction, as witnessed since September 2024, small and midcap stocks tend to underperform due to their higher beta and greater sensitivity to liquidity and risk appetite. The rupee depreciation, triggered by concerns around US-India trade negotiations and persistent FII outflows, led to a risk-off reaction in the broader market.

Future Outlook

Despite the current underperformance, market experts maintain a cautiously optimistic outlook for smaller stocks. As valuations cool and earnings visibility improves, selective opportunities may emerge, supported by India's GDP growth and domestic liquidity. After the 2025 correction, valuations in quality midcap stocks have become more reasonable compared to their peak levels, though broad-based rallies may remain unlikely unless earnings growth improves meaningfully.

Currency stability will be a key variable going forward. As the rupee stabilizes and gradually normalizes toward its historical Real Effective Exchange Rate averages, pressure on broader market valuations may ease, potentially allowing small and midcaps to recover and narrow the performance gap with largecaps.