HSBC, a leading global banking institution, has downgraded India’s equity market rating from “neutral” to “underweight.” The downgrade reflects rising inflation and declining domestic demand, which could adversely affect corporate earnings growth.
According to HSBC, the current consensus for earnings growth of approximately 16 percent year-on-year for 2026 is likely to be adjusted downward as macroeconomic challenges become more pronounced. The report emphasizes India’s significant dependence on imported energy, exposing the country to elevated global oil and gas prices, which could heighten costs across various sectors and reduce profitability.
The bank pointed out that increased energy costs may soon translate into higher fuel expenses for consumers, particularly following the conclusion of State elections. This scenario could lead to renewed inflationary pressures, negatively impacting consumption demand and hindering broader economic recovery.
HSBC also cautioned that inflation could put additional pressures on the financial sector, potentially resulting in an increase in non-performing loans as borrowers navigate stricter conditions. Such developments pose risks to both corporate earnings and financial stability.
Despite corrections in equity valuations from previous highs, HSBC warned that they might appear expensive again as earnings downgrades are factored into market expectations. Without a robust cyclical recovery, valuations could limit any further upward movement in the market.
Investor sentiment towards India remains cautious, influenced by concerns regarding growth, currency fluctuations, and global uncertainties. The Indian rupee (₹) is perceived as vulnerable to depreciation if oil prices continue to rise, which could hinder foreign investment inflows and returns.
Additionally, the impact of artificial intelligence on India’s important software services sector is increasingly under scrutiny, introducing further uncertainty into the economic outlook.
While domestic investment flows—particularly through systematic investment plans—continue to bolster the market, HSBC noted that India appears less appealing relative to its North-East Asian counterparts under the current circumstances.
Despite this cautious outlook, HSBC identified selective investment opportunities in sectors such as private banking, base metals, and healthcare.
