India regulator reviewing small, mid-cap funds' stress tests: sources

India's markets regulator is looking at whether local mutual fund schemes investing in small and mid-cap stocks would be able to withstand sharp falls in stock prices or sudden outflows, according to two sources with direct knowledge of the matter, reports Reuters.

Such funds have seen heavy inflows over the past year, pushing up the prices of small and mid-cap stocks and raising the risks of a steep correction should market conditions suddenly deteriorate.

In talks with the Association of Mutual Funds in India (AMFI) this month, the Securities and Exchange Board of India (SEBI) asked for small and mid-cap funds' internal stress tests so it could determine if they would have adequate liquidity to meet any large outflows, the sources said.

A SEBI request to review the results of funds' stress tests is rare.

While SEBI has completed one round of stress test reviews, it wants funds to test for more adverse scenarios, said one of the sources. The sources declined to be identified as discussions with the regulator were confidential.

SEBI and AMFI did not respond to requests for comment.