HSBC downgrades India again as oil shock deepens in 2026

What changed for India’s equity story

HSBC has downgraded Indian equities to “underweight” from “neutral”, marking its second downgrade in less than a month, according to a Reuters report citing the brokerage’s note. The call comes as the US-Iran war pushes crude higher and raises doubts about how durable India’s earnings recovery will be. India’s heavy dependence on imported oil puts energy prices at the centre of the market narrative. HSBC said India looks less attractive than North East Asian peers in the current macro setting.

The downgrade also lands during a period of visible risk-off behaviour by foreign investors. Foreign portfolio investors (FPIs) have been persistent sellers, while the rupee has weakened sharply. The combination of higher input costs, macro pressure, and the risk of earnings revisions has become a common thread across recent brokerage notes.

Oil prices: the trigger HSBC highlighted

Global crude oil prices have surged over 40% since the war began on February 28. India imports nearly 90% of the crude it consumes domestically, making it highly sensitive to any sustained rise in prices. Benchmark Brent, which was trading near $15 per barrel, has remained above $10 per barrel for more than seven weeks.

HSBC expects elevated energy prices to persist in the near to medium term. It also said crude and broader energy markets are likely to remain tight due to supply and production constraints through the June and September quarters. For Indian equities, this matters because energy costs flow into inflation, margins, and policy decisions.

Macro pressure: import bill, rupee, and current account

Higher crude prices increase India’s import bill and can widen the current account deficit, the HSBC note flagged. Persistent energy inflation can also pressure the rupee, especially when portfolio flows turn negative. These channels are closely linked: a larger import bill increases dollar demand, while risk-off sentiment reduces the supply of foreign capital.

The policy backdrop has also become more complicated. The Reserve Bank of India’s Monetary Policy Committee (MPC) has cut its growth projection to 6.9% for 2026–27, as cited in the article. The MPC also flagged the possibility of a rate hike if crude prices remain elevated, given the risk of imported inflation. This adds another variable for markets that had been focusing on growth resilience.

Earnings risk: what HSBC says could change

HSBC expects earnings forecasts for 2026 to be revised lower and currently projects 16% year-on-year growth. It also quantified the sensitivity to crude: a 20% increase in crude prices could trim earnings growth by 1.5 percentage points (150 basis points). That linkage is particularly relevant for sectors where fuel and logistics are meaningful cost lines, and for industries where crude is a base input.

The brokerage also noted that while Indian equity valuations have corrected, they may still look expensive if earnings downgrades start coming through. That is a key point because a valuation correction without a stabilisation in earnings expectations can keep risk premiums elevated.

Foreign flows: outflows build alongside currency weakness

India continues to see sustained foreign investor outflows. FPIs have offloaded $18.5 billion worth of Indian equities in 2026 so far, after withdrawing $18.9 billion in 2025, based on the data cited. A Bloomberg report also described India as the “most vulnerable” emerging Asia market due to energy prices, and noted foreign institutional investors had dumped around $18 billion worth of Indian stocks in the last one and a half months since the Iran war began.

Currency moves have reinforced the risk perception. The rupee was described as one of the worst-performing Asian currencies in 2025, and it has depreciated nearly 10% so far this year despite a weaker dollar, as investors shifted funds to safer assets and pulled back from emerging markets. In another market update within the provided text, the rupee hit an all-time low of 93.72 against the US dollar.

How Indian indices reacted during the war-driven volatility

Market moves have been sharp and uneven. In one early session after the opening bell, the Sensex plunged more than 2,700 points in early trade, later recovering part of the losses but still trading nearly 1,000 points lower by 10:30 am. The Nifty 50 hovered around 24,850 during that time.

On a separate day after a relief rally, the Sensex fell 931 points, or 1.2%, to close at 76,632, while the Nifty 50 declined 222 points, or 0.9%, to settle at 23,775. The drop was described as the steepest single-day decline for both indices since March 30. In another session tied to higher crude and risk-off sentiment, the Nifty 50 settled at 22,819.60, down 2.1%, while the Sensex closed at 73,583.22, down 2.3%.

HSBC’s note also pointed to year-to-date weakness: the Nifty 50 and BSE Sensex are down 6.7% and 7.9% so far this year, making India among the worst-performing markets in that comparison.

Stocks and sectors: what the text flagged

The provided text highlighted that stocks with direct Middle East exposure saw sharper cuts as investors focused on revenue concentration in a war-sensitive region. It cited examples where one stock fell over 3% and hit a 52-week low of ₹2,551.55, and another fell nearly 12% to a 52-week low of ₹517.90. It also listed companies such as Larsen & Toubro, Tata Consultancy Services, KEC International, VA Tech Wabag, and Kalyan Jewellers as seeing notable declines due to Middle East exposure.

At the index level, financials led losses in one session, with Nifty Financial Services, PSU Bank, and Private Bank indices each down over 1%. In contrast, metal and health care stocks bucked the broader weakness during that session. Broader markets were also hit in another update, with Nifty mid-cap indices down over 2% and small-cap indices down 1.7-1.9%.

Global brokerages: a more cautious tone spreads

HSBC’s downgrade is part of a wider shift among global banks cited in the text. BofA Securities cut its Nifty FY27 earnings growth estimate to 8.5% year-on-year from 11% earlier, warning that Indian equities are “still not in a value zone” despite the recent correction driven by the Iran conflict and stagflation risks.

Goldman Sachs also downgraded Indian equities to “market weight” from “overweight”, citing a less attractive risk-reward compared with North Asian markets and a worsening macro environment with slowing earnings growth. In the same set of updates, Goldman was also reported to have trimmed its earnings growth forecast for 2026 to 8% from 16% earlier, and for 2027 to 13% from 14%.

Key numbers to track

Why the downgrade matters for Indian investors

The story is less about a single downgrade and more about the linked set of risks that crude can create for India: margin pressure, a weaker currency, and reduced policy flexibility. When FPIs are already net sellers, the market can become more sensitive to negative macro surprises. HSBC’s framing that India looks less attractive than North East Asian peers in the current macro setting is also a reminder that relative allocation decisions can drive flows.

For investors, the most measurable near-term variables in the text are crude’s trajectory, the pace of foreign selling, and whether earnings forecasts start getting revised down as the earnings season approaches. Multiple brokerages cited have already pointed to slower earnings growth assumptions, which can influence valuation debates even after a correction.

Conclusion

HSBC’s second downgrade in a month puts the oil shock, foreign outflows, and earnings risks at the centre of the India equity debate. With Brent staying above $10 for weeks and FPIs continuing to sell, the market’s focus remains on macro stability, the rupee, and the path of corporate earnings. The next key signposts flagged in the text are crude price trends through the June and September quarters and how companies and analysts adjust earnings expectations for 2026.