HSBC downgrades India stocks to underweight in 2026

What changed in HSBC’s India view

HSBC downgraded Indian equities to “underweight” from “neutral” in a note issued on Thursday, marking its second cut in less than a month. The bank linked the decision to a fresh oil shock stemming from the Middle East war, arguing it could test the durability of India’s earnings recovery. HSBC said India looks less attractive than North East Asian peers in the current macro environment. The call comes at a time when Indian benchmark indices have lagged several global markets this year.

Oil above $100 puts earnings recovery at risk

HSBC’s central concern is energy. Brent crude is up 42% since the war started in late February and is trading above $100 a barrel, a level HSBC said raises both inflation and growth risks for the world’s third-largest oil importer. The note added that oil and gas markets may remain tight through most of the June and September quarters, keeping the risk skewed to elevated fuel costs.

Higher energy prices can flow through to companies in multiple ways: increased input costs, higher transport and logistics expenses, and pressure on consumer demand if fuel inflation squeezes household budgets. HSBC’s view is that these channels could weaken the earnings path the market has been pricing.

Index performance: Nifty and Sensex among laggards

HSBC pointed to recent market performance as part of the context for its relative call. The Nifty 50 is down 6.7% so far in 2026, while the Sensex is down 7.9%, described in the note as among the worst-performing markets globally this year. The bank’s assessment is not just about absolute returns, but about relative attractiveness versus North East Asian markets under the current macro setup.

What HSBC expects on consensus earnings for 2026

HSBC said it expects consensus earnings forecasts for calendar 2026, currently at 16% year-on-year growth, to be revised lower. It also quantified oil sensitivity: a 20% increase in crude prices could knock off 1.5 percentage points in earnings growth.

The bank argued that even though domestic equity valuations have corrected from peak levels, valuations could start to look expensive again if downgrades to earnings estimates come through. In practical terms, that means valuation comfort can fade even without a fresh price rally if the “E” in P/E is cut.

Inflation, fuel pricing, and demand risks

In a related assessment, HSBC flagged the risk of a renewed uptick in inflation if retail fuel prices are adjusted upward after state elections, with a possible timing of early May mentioned. It said the government has so far shielded consumers from higher global oil prices, but a shift in pump prices could transmit the oil shock into broader inflation.

HSBC warned that higher inflation could dampen consumption demand and increase stress in the financial system through rising non-performing loans, which would add another layer of downside risk to earnings expectations for 2026.

Foreign flows: outflows continue despite SIP support

HSBC also highlighted investor positioning and currency risk. It said foreign investors remain cautious, citing concerns about rupee depreciation if oil prices stay elevated. The note also referenced growing concerns about the impact of artificial intelligence on Indian software services, adding to the list of factors that can restrain foreign inflows.

On flows, HSBC noted that foreign portfolio investors (FPIs) have sold $18.5 billion of Indian stocks in 2026, after selling $18.9 billion last year. It added that domestic flows, particularly via systematic investment plans (SIPs), remain supportive. However, HSBC said stronger IPO activity after a seasonally weak first quarter may require a renewed pickup in foreign demand.

Where HSBC still sees selective opportunity

Despite the downgrade, HSBC said opportunities remain in select pockets of the market. It flagged private sector banks, base metals, and parts of healthcare as areas where it still sees more resilient or selective setups, even as the broader relative case for Indian equities has weakened.

Key figures from HSBC’s note

Why the downgrade matters for investors

The downgrade links India’s equity outlook to a macro variable that can shift quickly: oil. HSBC’s framework suggests that if crude remains elevated through the June and September quarters, the pressure is likely to show up in earnings revisions, valuation debates, currency expectations, and the pace of foreign inflows.

For equity investors, the key takeaway from HSBC’s note is its expectation that the market’s current earnings trajectory is vulnerable to an energy-led inflation shock. For asset allocators, the message is relative: HSBC is comparing India’s setup against North East Asia and concluding that India’s risk-reward is less compelling under current conditions.

Conclusion

HSBC’s move to underweight underscores how a sustained period of $100-plus oil can ripple through India’s macro assumptions, earnings forecasts, and foreign investor appetite. The bank expects 2026 consensus earnings growth of 16% to face downside revisions, and it continues to watch oil-market tightness through the mid-year quarters. Investors will also track whether retail fuel pricing changes after state elections and whether foreign flows stabilise as IPO activity picks up.