A wave of deleveraging by retail investors has triggered the biggest rout in Indian small-cap stocks in seven months, as mounting concerns over inflation and higher interest rates weigh on sentiment.

The selling was exacerbated by unwinding of positions funded by margin loans, brokers said, hitting one of the few pockets of India’s $4.8 trillion market that have bucked broader weakness this year.

An index of small-cap companies tumbled as much as 3.7% Friday, the most since March 23 and erasing its gain for the year. Smaller stocks account for the majority of leverage-based wagers by retail traders.

“The selloff in small caps is being exacerbated by forced liquidation of margin-trading positions,” said Ambareesh Baliga, an independent researcher analyst in Mumbai. “The bigger concern is whether the sharp losses trigger a slowdown in mutual-fund flows into small- and mid-cap funds, or even lead to redemptions,” he said.

Outstanding margin loans declined to less than 1.55 trillion rupees ($16.3 billion) this month from a record high of 1.6 trillion rupees on Sept. 30, according to IndiaMTF.com.

Indian equities have been among the worst performers globally this year on selling of large caps by foreign investors due to the market’s lack of meaningful artificial intelligence bets.

Small caps had been outperforming until the recent resurgence in oil, which has driven up bets on further central bank rate hikes to tame inflation. That would weigh disproportionately on smaller firms that are highly dependent on the local economy.

Margin trades are “bound to show losses when most stocks are considerably lower from their peak,” said Ashish Nanda, chief business digital officer at Kotak Neo. “Not maintaining margins can lead to broker liquidation positions.”