HSBC has downgraded Indian equities to “underweight” from “neutral”, marking its second downgrade in less than a month, as rising crude oil prices linked to the Middle East conflict are seen threatening the durability of India’s earnings recovery.
Brent crude has risen around 42 per cent since the conflict escalated in late February and is currently trading above USD 100 per barrel, increasing risks to inflation and economic growth for India, one of the world’s largest oil importers.
In a note on Thursday, HSBC said India now appears less attractive than North East Asian markets under the current macroeconomic backdrop. The Nifty 50 and BSE Sensex have declined 6.7 per cent and 7.9 per cent, respectively, so far this year, making them among the weaker-performing global markets.
The brokerage expects oil markets to remain tight through the June and September quarters, which could lead to downward revisions in earnings forecasts. Current consensus estimates project earnings growth of around 16 per cent for 2026, but HSBC said a 20 per cent rise in crude prices could reduce growth by about 1.5 percentage points.
While valuations have moderated from recent highs, the brokerage cautioned that they could appear expensive again if earnings expectations are cut. It also highlighted concerns among foreign investors, including risks from rupee depreciation if oil prices remain elevated, as well as uncertainties linked to the impact of artificial intelligence on India’s IT services sector.
Foreign portfolio investors have already sold Indian equities worth USD 18.5 billion in 2026, following outflows of USD 18.9 billion in the previous year.
Although domestic flows, particularly through systematic investment plans (SIPs), continue to provide support, HSBC noted that stronger IPO activity later in the year may require renewed foreign inflows to sustain market momentum.
The brokerage added that selective opportunities remain in sectors such as private banks, base metals and healthcare, but said the broader investment case for Indian equities has weakened under current conditions.