HSBC has downgraded Indian equities to 'underweight' from 'neutral' - its second cut in less than a month - as surging energy prices triggered by the Middle East war threaten the durability of the country's earnings recovery. According to Reuters, Brent crude is up 42% 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, with the benchmark Nifty 50 and Sensex falling 6.7% and 7.9% 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, with a 20% increase in crude prices potentially knocking off 1.5 percentage points in earnings growth.
The Nifty 50 index has declined by 7% year-to-date, reflecting investor concerns about the ongoing US-Iran conflict. According to reports from Mint, the index plunged over 11% in March following the combined forces of the US and Israel attacking Iran on 28 February. While the index touched its recent low of 22,182 on 2 April, it has shown a healthy recovery of about 9% in April as diplomatic efforts towards ending the war have gained momentum. However, in the last three straight sessions, the key benchmark indices witnessed sharp selling, with the Nifty 50 index slipping below 24,000 and finishing close to its immediate support at 23,800 to 23,850. As of latest market data, Nifty 50 stands at 24,416 with a -0.65% decline for the day.
Brent crude has swung from sub-$80 to north of $120 per barrel since hostilities began, creating significant pressure on corporate margins. As reported by Equirus Securities, even if peace returns and the Strait of Hormuz fully reopens in the second half of 2026, a return to the $60–70 per barrel range remains unlikely due to a deep inventory deficit. The Brent-linked Indian crude basket is at US$100.4/bbl versus US$69 in February (+45%). According to Hariprasad K from Livelong Wealth, for every $10 rise in oil prices, India's current account deficit widens materially, which directly feeds into currency weakness. The rupee touching around ₹94.85 per dollar reflects that stress, alongside continued foreign outflows. Current Brent crude is trading at $100 per barrel, up 42% from pre-war levels, while natural gas (Nymex) is at $2.7, showing a 1.1% increase.
Foreign portfolio investors have already offloaded $18.5 billion of Indian stocks in 2026, after selling equities worth $18.9 billion last year, according to Reuters. While domestic flows, particularly through SIPs, remain supportive, HSBC noted that stronger IPO activity after a seasonally weak first quarter may require a renewed pickup in foreign demand. The BSE market cap has returned to pre-war levels, with April MTD DII buying of ₹33,837 Cr against FII outflows of ₹44,281 Crore. However, cumulative FII outflows remain at ₹1.61 lakh Crore since February-end. 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. Despite current challenges, selective opportunities remain in private banks, base metals and healthcare, but the broader relative case for Indian equities has weakened.
Corporate earnings estimates forecast a lowering of 9-10% for FY27, based on assumptions of crude prices being range-bound between $80-$120 per barrel and swift war resolution. As reported by Client First Capital, sectors most affected include airlines, oil refiners, paints, fertilisers and restaurants. Oil marketing companies, aviation, paints, chemicals, logistics and energy-sensitive businesses face the biggest near-term risk, while banks could feel pressure if inflation delays rate relief. The India-Gulf trade with UAE, Saudi, Iraq has dropped by up to 66% in March, highlighting the broader economic impact of the conflict. Valuations have corrected, with the Nifty now trading near 19x earnings versus its long-term average of around 22x, bringing the market closer to fair value but not necessarily to deep-value territory.
Despite current challenges, market analysts believe there's potential for recovery if tensions ease. According to Shashank Udupa from Smallcase, while the first-order impact (oil spike) is already priced in, second-order effects like shipping costs up 300%, frozen fertiliser supply chains, and re-igniting inflation are what markets are underestimating. Nifty valuations look reasonable, and if everything stabilises over time, there's room for meaningful re-rating led by domestic sectors. The India-South Korea target USD 54 billion trade by 2030 initiative provides a positive long-term outlook amid current geopolitical uncertainties. Amol Athawale from Kotak Securities noted that 24,000/77000 would act as a crucial reference point for traders, with potential downside to 23,635/76000 levels if the correction wave continues. However, the market has discounted the immediate shock but has not fully priced in a scenario of sustained geopolitical disruption or a prolonged oil shock.
