For the first time since its inception, the RainGauge Index (RGI) officially entered bear market territory. This drop marks a sharp deviation in sentiment and performance for the index that many had once viewed as a high-beta proxy for innovation-driven mid-cap growth. Over the past two years, the RGI showed a close correlation with the NASDAQ, mirroring its movements and offering exposure to a similar tech-heavy and growth-oriented basket. But Q3 FY25 brought a significant shift, not only in price action but also in the underlying dynamics driving the RGI.
RGI Breaks Away from NASDAQ, Follows Indian Mid Cap Path
One of the most striking developments during Q3 FY25 was the decoupling of the RGI from the NASDAQ. Historically, the two indices moved in tandem. Investors looked at the RGI as a regional counterpart to the NASDAQ, particularly in terms of sector exposure and risk appetite. However, this correlation fell apart over the past quarter. While the NASDAQ posted a modest recovery on the back of strong earnings from major tech giants and a rebound in AI-related stocks, the RGI faltered.
Instead of following its global cousin, the RGI began tracking more closely with India’s S&P BSE Mid Cap Index. The resemblance in performance became increasingly evident by the end of March 2025. The RGI’s trajectory aligned with the broader correction in Indian mid-cap names, which faced both domestic macro headwinds and external policy shocks.
A Deep Dive into the Numbers: A Broad-Based Decline
Our analysis of Q3 FY25 results for companies listed on the RainGauge Index reveals some key patterns. Even before the tariff announcements in March 2025, RGI stocks were already under pressure. Over the six-month period leading up to the end of Q3, the index dropped approximately 20 percent. This drawdown spread across the board, with most components facing persistent selling pressure.
Only 5 out of the 38 companies in the RGI managed to stay in the green during this period. The rest experienced significant erosion in market value. In fact, many of these stocks saw declines exceeding 20 percent from their 52-week highs. This widespread underperformance pushed the RGI firmly into bear market territory, with investor sentiment turning increasingly cautious.
The decline was not restricted to a few sectors. While some segments like consumer discretionary and specialty manufacturing took bigger hits, even the traditionally resilient digital services and export-oriented tech firms failed to hold their ground. Several of these businesses reported relatively strong earnings, but the market reaction remained muted or even negative. Investors chose to de-risk across the board rather than selectively reward performance.
Weak Earnings Sentiment and Pre-Tariff Anxiety
In the lead-up to March 2025, the market was already showing signs of strain. Despite earnings from RGI companies showing resilience in some pockets, the sentiment remained weak. Investors had begun to price in potential macroeconomic headwinds, including inflationary pressures, weakening global demand, and currency volatility. These concerns overshadowed otherwise stable quarterly results.
Adding fuel to the fire, speculation around impending tariffs began to take hold in mid-February. While the formal announcement came only in March, the markets had already started factoring in potential disruptions. Companies with significant export exposure, especially in electronics, industrial components, and software services, took the biggest hit. Several management teams flagged concerns over supply chain realignments and increased input costs in their Q3 commentary, amplifying the market’s nervousness.
Sectoral Breakdown: Winners and Losers
Among the handful of outperformers, firms with strong domestic demand drivers managed to buck the trend. Two names in the clean energy infrastructure space stood out, posting double-digit gains even as the broader index slipped. Their performance reflected growing investor interest in government-backed green projects and decarbonization initiatives, which remain relatively insulated from global trade disruptions.
Another bright spot came from a mid-cap financial services provider that saw strong AUM growth and stable asset quality metrics. Its digital-first strategy and focus on underserved markets helped it beat expectations and attract institutional interest.
But these were exceptions in an otherwise gloomy landscape. The worst-hit segments included:
- Consumer tech: Valuations compressed sharply amid rising competition and margin pressures. Growth rates failed to justify earlier exuberance.
- Industrial exporters: Pre-tariff concerns triggered sell-offs. Investors feared a repeat of previous cycles where export-driven companies bore the brunt of protectionist policy changes.
- Digital transformation services: This segment saw mixed earnings but faced consistent derating as clients globally pulled back on discretionary IT spending.
Investor Sentiment: Flight to Safety Begins
The shift in investor behavior became increasingly pronounced throughout Q3. Capital rotated out of mid-cap growth names, including those in the RGI, and moved into large-cap defensives. Funds that had earlier favored the RGI for its dynamic exposure began reallocating toward more stable names in FMCG, pharma, and large-cap banks.
This change reflected a broader risk-off sentiment. Portfolio managers cited valuation concerns, policy uncertainty, and lack of earnings upgrades as key reasons for their move. Retail investors also began to lose confidence, with mutual fund flow data showing net redemptions from mid-cap schemes that tracked or mirrored the RGI’s holdings.
A Pivotal Moment for the RGI
With the RGI now in bear market territory and its correlation with the NASDAQ broken, a key question looms: What does the future hold for the index?
The answer will depend on several variables. First, the actual impact of tariffs and trade frictions must play out. If RGI companies can navigate the regulatory challenges and adapt quickly, the index may find a bottom and begin to recover. However, any prolonged uncertainty could keep pressure on valuations.
Second, earnings growth will be critical. The next few quarters must deliver more than just stability. Investors are now demanding visibility into future growth, cost control, and strategic execution. Companies that fail to articulate a clear path forward may continue to underperform, regardless of sector or prior momentum.
Third, global and domestic macro factors will influence recovery. Interest rate trajectories, commodity prices, and political developments in key markets like the US and India will shape investor sentiment. The RGI, as a hybrid index with exposure to both global and local trends, remains highly sensitive to these shifts.
Conclusion: RGI at a Crossroads
The RainGauge Index finds itself at a critical inflection point. The break from its historical correlation with the NASDAQ underscores the uniqueness of the current correction. Unlike past dips, this downturn stems not just from external shocks but also from deeper re-evaluations of valuation, growth potential, and macro risk.
For now, the index resembles the S&P BSE Mid Cap more than the NASDAQ, both in behavior and sentiment. But this phase could also offer opportunities. For discerning investors, some of the most battered names in the RGI could become attractive if their fundamentals remain intact and their valuations offer enough margin of safety.
What remains clear is that the RGI’s journey in FY25 will serve as a key case study in how innovation-focused mid-cap indices respond to layered uncertainties—both global and local. Investors should brace for volatility but also keep an eye out for the resilience that may emerge from the rubble.