Global brokerage HSBC has once again lowered its stance on Indian equities, shifting its recommendation to “underweight” from “neutral.” This marks the second downgrade in less than a month, reflecting a rapidly changing macroeconomic environment driven primarily by rising crude oil prices and escalating geopolitical tensions in the Middle East.

The downgrade comes at a time when Brent crude prices have surged sharply up nearly 42% since late February—and are now trading above the psychologically important $100 per barrel mark. For India, the world’s third-largest oil importer, such a move has direct and immediate implications on inflation, currency stability, and corporate profitability.

HSBC’s latest note highlights that the current macro setup is becoming increasingly unfavourable for India relative to other emerging markets, particularly North East Asia. Indian benchmark indices, including the Nifty 50 and BSE Sensex, have already underperformed global peers, declining 6.7% and 7.9% respectively so far this year. This relative weakness is now being compounded by external shocks.

At the core of HSBC’s concern is the sustainability of India’s earnings recovery. Consensus estimates currently peg FY26 earnings growth at around 16% year-on-year. However, the brokerage warns that these projections are vulnerable. It estimates that a 20% increase in crude oil prices could shave off approximately 1.5 percentage points from earnings growth, signalling a direct transmission of energy costs into corporate margins.

The brokerage also expects oil and gas markets to remain tight through the June and September quarters, suggesting that elevated energy prices may not be a short-term phenomenon. This has broader implications not just for inflation, but also for consumption demand and fiscal stability.

From a valuation perspective, the situation is equally nuanced. While Indian equities have corrected from their recent peaks, HSBC cautions that this does not necessarily translate into comfort on valuations. If earnings downgrades materialise, current valuations could once again appear stretched, especially when compared with peers in Asia that may benefit from lower input cost pressures.

Foreign investor sentiment is another critical variable. Elevated oil prices typically put pressure on the Indian rupee, raising the risk of currency depreciation. This, in turn, can deter foreign portfolio investors (FPIs), who are already showing signs of caution. Data indicates that FPIs have sold approximately $18.5 billion worth of Indian equities so far in 2026, following outflows of $18.9 billion in the previous year. Sustained outflows at this scale could further weigh on market liquidity and sentiment.

Additionally, HSBC flagged emerging structural concerns, particularly around the impact of artificial intelligence on India’s software services sector. While not an immediate earnings risk, it adds another layer of uncertainty for foreign investors evaluating long-term growth prospects.

Domestic flows, however, continue to provide some cushion. Systematic Investment Plans (SIPs) and retail participation have remained resilient, supporting market stability despite foreign outflows. That said, HSBC points out that a revival in IPO activity especially after a seasonally weak first quarter—could increase the demand for capital, making renewed foreign inflows more critical.

Despite its cautious stance, HSBC has not turned entirely negative on all segments of the market. It continues to see selective opportunities in private sector banks, base metals, and healthcare sectors that may either benefit from structural tailwinds or remain relatively insulated from energy price shocks.