Global banking major HSBC has downgraded India’s equity market rating to “underweight” from “neutral”, flagging concerns over rising inflation and weakening domestic demand that could impact corporate earnings growth.

The brokerage said current consensus expectations of around 16 per cent year-on-year earnings growth for 2026 are likely to be revised downward as macroeconomic headwinds intensify. India’s heavy reliance on imported energy leaves it exposed to elevated global oil and gas prices, which could push up costs across sectors and erode profitability.

HSBC noted that higher energy prices may soon translate into increased fuel costs for consumers, especially after the conclusion of the State elections. This, in turn, could trigger a fresh rise in inflation, undermining consumption demand and slowing the broader economic recovery.

The report also warned that inflationary pressures could spill over into the financial sector, with a potential rise in non-performing loans as borrowers face tighter conditions. Such developments would pose downside risks to corporate earnings and financial stability.

Although equity valuations in India have corrected from earlier highs, HSBC cautioned that they may appear expensive again as earnings downgrades begin to reflect in market expectations. Without a strong cyclical recovery, valuations could remain a constraint on further market upside.

Cautious stance

Foreign investor sentiment towards India remains cautious amid concerns over growth, currency volatility and global uncertainty. The rupee (₹) is seen as vulnerable to depreciation if oil prices stay elevated, which could further dampen foreign inflows and returns.

HSBC also highlighted that investors are increasingly assessing the impact of artificial intelligence on India’s key software services sector, adding another layer of uncertainty to the outlook.

While domestic investment flows, particularly through systematic investment plans, continue to provide support to the market, HSBC said India currently appears less attractive relative to its North-East Asian peers in the prevailing environment.

Despite the downgrade, the brokerage maintained that selective opportunities remain in sectors such as private banking, base metals and healthcare, even as the broader market outlook turns cautious.

Published on April 23, 2026