Indian Markets Under Pressure: Corporate Earnings Key to Recovery, Says HSBC
Foreign outflows and rising yields weigh on Indian markets, but HSBC predicts corporate earnings will trigger a recovery.
The Indian financial landscape is currently navigating a challenging phase as foreign investor outflows and climbing global bond yields create significant headwinds. According to recent equity and debt market reviews by HSBC Mutual Fund, while these factors are weighing down the markets, a recovery in corporate earnings is expected to be the primary engine driving equity returns in the near term.
September Slump: A Broad-Based Correction
The month of September witnessed a broad-based correction across Indian equities. This downturn was fueled by a combination of rising crude oil prices, renewed geopolitical instability in the Middle East, and the implementation of tighter monetary policies by major global economies.
The impact was felt across various indices:
- Nifty 50: Declined by 6 per cent.
- Nifty Midcap 150: Fell by 7.1 per cent.
- Nifty Smallcap 250: Dropped by 3.1 per cent.
Sector-wise, the Information Technology and Automobile industries bore the brunt of the sell-off, plummeting by 11 per cent and 9 per cent, respectively.
The Tug-of-War: FIIs vs. DIIs
A stark contrast emerged in investor behavior during September. Foreign Institutional Investors (FIIs) shifted to a selling spree, withdrawing USD 4.1 billion from Indian equities. This move completely reversed the USD 2.4 billion inflow seen in August and pushed the total selling by FIIs in 2026 to a staggering USD 28.3 billion.
However, the market found a safety net in Domestic Institutional Investors (DIIs), who remained net buyers, pumping USD 8.1 billion into the market during the same period.
Path to Recovery: What Lies Ahead?
Despite the current volatility, HSBC maintains a supportive long-term outlook for Indian equities. The fund house believes that several catalysts could spark a revival:
- Corporate Earnings: In an era of global uncertainty, growth in corporate profits is viewed as the central driver for market returns.
- Private Investment: An increase in private capital expenditure is expected to bolster the economy.
- Global Trade: Potential trade agreements with the United States and the European Union could provide a significant boost.
From a valuation perspective, HSBC noted that the Nifty 50 is currently trading at 17 times its one-year forward earnings, which is approximately 13 per cent below its five-year average valuation, suggesting a potential window for recovery.
Debt Market Pressures and RBI's Stance
The debt market has not been immune to these pressures. HSBC highlighted the RBI's rate hike to 5.50 per cent on October 7 as a response to rising inflation risks, triggered by deficient monsoon conditions and elevated commodity prices.
The fund house warned that the repo rate could climb further to 6 per cent if global interest rates remain high or if inflation continues to worsen. While sentiment in the debt market remains weak, HSBC suggested that bond valuations are becoming more attractive as yields rise. The firm indicated it might consider adding duration if there is a sustainable moderation in crude oil prices or US Treasury yields.
The Risk Factors
While the outlook for recovery is optimistic, HSBC flagged several ongoing risks that could impede progress:
Brent crude oil prices rose by 14 per cent in September, and the global shift toward tighter monetary policies continues to put pressure on both Indian debt and equity markets.
Ultimately, the trajectory of the Indian markets will depend on the synergy between reviving corporate earnings, a resurgence in private capital expenditure, and the stabilization of global yields and domestic inflation.