A crucial indicator of small-cap stocks in India is poised to erase losses from last month's lows, with bullish investors putting the regulatory warning about market froth behind them.

An eight-day rise has placed the Nifty Smallcap 250 Index on track to recapture the February 27 level, when the securities regulator warned of a potential bubble in smaller companies.

"The bounce back in small-cap shares was expected to be sharp," said Chokkalingam G, an Equinomics Research strategist. Investors are favoring smaller companies with stronger economic fundamentals, and "there is clearly a shift to quality," he stated.

The crash came after a relentless increase in such stocks, fueled by strong results and a steady influx of capital from private investors. The comeback reinforces the sustained positive forecast for smaller businesses, which are projected to benefit more than their larger counterparts from the country's healthy economic growth.

The Securities and Exchange Board of India's statements prompted a severe selloff among smaller companies. The S&P BSE Small Cap Index lost more than $80 billion in market value in less than two weeks until mid-March.