HSBC downgraded Indian equities to "underweight" from "neutral" - its second cut in less than a month - as it expects surging energy prices triggered by the West Asia war to threaten the durability of the country's earnings recovery.
Brent crude is up 42 per cent since the war started in late February and is currently trading above $100 a barrel, raising inflation and growth risks for the world's third-largest oil importer.
"India now looks less attractive than North East Asian peers in the current macro setting," HSBC said in a note on Thursday, with the benchmark Nifty 50 and Sensex falling 6.7 per cent and 7.9 per cent so far this year - among the worst performing markets globally.
HSBC expects oil and gas markets to remain tight through most of the June and September quarters. Against that backdrop, it expects consensus earnings forecasts for 2026 - currently at 16 per cent year-on-year growth - to be revised lower. A 20 per cent increase in crude prices could knock off 1.5 percentage points in earnings growth.
The brokerage said that although domestic equity valuations have corrected from their peaks, they may appear expensive again as earnings downgrades filter through.
It 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, after selling equities worth $18.9 billion last year.
While domestic flows, particularly through SIPs, remain supportive, HSBC said stronger IPO activity after a seasonally weak first quarter may require a renewed pickup in foreign demand.
It added that selective opportunities remain in private banks, base metals and healthcare, but the broader relative case for Indian equities has weakened.