HSBC Downgrades India's Economic Growth Following Sharp Increase in Crude Oil Prices

HSBC Downgrades Indian Equities Due to Rising Energy Prices

HSBC has downgraded Indian equities to "underweight" from "neutral", marking its second cut in less than a month. The decision comes as the brokerage expects surging energy prices triggered by the Middle East war to threaten the durability of the country's earnings recovery.

The global economic landscape has been significantly impacted by the ongoing conflict, with Brent crude prices soaring 42% since the war started in late February. As a result, Brent crude is currently trading above $100 a barrel, raising inflation and growth risks for the world's third-largest oil importer. This development has led to a decline in the benchmark Nifty 50 and Sensex, which have fallen 6.7% and 7.9% respectively so far this year, making them among the worst performing markets globally.

HSBC expects oil and gas markets to remain tight through most of the June and September quarters. As a result, the brokerage anticipates that consensus earnings forecasts for 2026, currently at 16% year-on-year growth, will be revised lower. Specifically, a 20% increase in crude prices could knock off 1.5 percentage points in earnings growth.

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Domestic equity valuations have corrected from their peaks, but HSBC notes that they may appear expensive again as earnings downgrades filter through. The brokerage also flagged foreign investor concerns, including rupee depreciation risks, if oil prices stay elevated amid growing concerns related to the impact of artificial intelligence on Indian software services.

Foreign portfolio investors have already offloaded $18.5 billion of Indian stocks in 2026, following the sale of equities worth $18.9 billion last year. While domestic flows, particularly through Systematic Investment Plans (SIPs), remain supportive, HSBC suggests that stronger IPO activity after a seasonally weak first quarter may require a renewed pickup in foreign demand.

HSBC has identified selective opportunities in private banks, base metals, and healthcare, but the broader relative case for Indian equities has weakened. As a result, the brokerage's decision to downgrade Indian equities reflects its cautious outlook on the country's growth prospects in the face of rising energy prices.

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