HSBC downgrades India for the second time in a month, explains 'underweight' stance

Brokerage firm HSBC has downgraded Indian equities to "underweight", in its latest note on Thursday, April 23, less than a month after downgrading it to "neutral" from "overweight" on March 31 this year. The firm has cited a less-attractive "risk-reward" as its rationale behind the downgrade.

"The ongoing Middle East conflict has refocused attention on downside growth risks, given India’s significant reliance on imported energy. Growth has showed signs of improvement in the last two quarters, but we think the recovery from hereon will be delayed," HSBC wrote in its note.

The brokerage also noted that while valuations have fallen materially from their peak, they will rise again as earnings cuts come through. "Without the anticipated cyclical acceleration in growth, valuations are likely to remain a constraint," the note said further.

HSBC said that its oil and gas analyst expects the physical market to remain acutely tight during the second and third quarter of this calendar year, thereby anticipating oil prices to remain elevated in the months to come.

The brokerage went on to add that although the Indian government and the state-run oil marketing companies have absorbed much of the impact so far, petrol and diesel prices will be revised higher once the state elections conclude, most likely in early May.

"A renewed rise in inflation could undermine the gradual recovery in demand and contribute to higher non-performing loans across the lending sector, creating downside risks to 2026 earnings," HSBC said, adding that historically, a 20% rise in crude prices has been associated with earnings compression of around 1.5 percentage points.

HSBC expects consensus to notably cut its growth expectations in the coming months from the current 16% year-on-year for financial year 2027.