HSBC Downgrades India to Underweight Amid Inflationary Pressures and Delayed Recovery

HSBC has downgraded India to underweight from neutral, citing inflationary pressures from elevated oil prices and demand as key concerns, marking its second downgrade in less than two months.

The brokerage anticipates a delay in India’s economic recovery, with potential earnings cuts expected to impact valuations despite recent market sell-offs.

This downgrade reflects weakening relative attractiveness for Indian equities compared to regional peers, as headwinds erode India’s standing versus the rest of the region.

Reasons for Downgrade

HSBC cited ongoing West Asia conflict as refocusing attention on downside growth risks, given India’s significant reliance on imported energy.

The brokerage noted that growth has shown signs of improvement in the last two quarters but expects the recovery from hereon to be delayed.

Valuations have fallen materially from their peak, but HSBC warned they will rise again as earnings cuts come through, stating that without anticipated cyclical acceleration in growth, valuations are likely to remain a constraint.

Market Impact and Opportunities

Despite the downgrade, HSBC sees opportunities in India’s private banks, base metals, and select healthcare companies.

The brokerage remains most bullish on China, Hong Kong and Singapore, while upgrading South Korea to neutral from underweight.

Other than India, Indonesia and Thailand are among HSBC’s least preferred markets.

Broader Context

HSBC had previously cut India to neutral late in March, citing less attractive risk-reward, after the March sell-off eased valuation concerns but expected pressure on corporate profitability could undo the advantage.

Foreign portfolio investors have already offloaded $18.5 billion of Indian stocks in 2026, after selling equities worth $18.9 billion last year, while domestic flows, particularly through SIPs, remain supportive.

HSBC expects stronger IPO activity after a seasonally weak first quarter may require a renewed pickup in foreign demand.