Global research firm HSBC has upgraded India’s equity market to ‘Overweight’ from ‘Neutral’, citing improving valuations, supportive government policies, and resilient domestic investor flows. The agency has set a Sensex target of 94,000 by end of 2026, indicating an upside potential of over 13% from current levels.

Indian equities have lagged behind emerging markets by 30 percentage points since mid-September 2024, weighed down by a slowdown in domestic growth and elevated valuations, as per HSBC Global Investment Research report released today.

The BSE benchmark Sensex is currently trading around 82,100, down 4.5% from its 52-week high of 85,978 touched in September 2024. In the past three months, the index gained 2.2%, while six-month returns were stronger at 14.5%. Over the 12-month period, the Sensex fell 2.8%, but the 24-month performance remains robust, up 34.1%.

“While earnings growth expectations can fall a little further, valuations are no longer a concern, government policy is becoming a positive factor for equities, and most foreign funds are lightly positioned. We think Indian equities now look attractive on a regional basis and upgrade the market to overweight (from neutral),” HSBC said in its report.

The report noted that the 50% tariffs imposed by the U.S. President Donald Trump’s administration on imports from India have also dampened market sentiment. The agency, however, sees signs of regional attractiveness in India’s market.

Macro conditions turn favourable

Domestic macro conditions have turned much more favourable for Indian equities. Inflation has softened significantly from above 6% y-o-y in October 2024 to an eight-year low of 1.6%. This has allowed the central bank to cut rates and ease lending standards, the report highlighted.

The government measures, including February’s income tax cuts and the recent GST overhaul, are expected to restore confidence in the market. While these steps can support short-term demand, sustained revival will require stronger investment and wage growth, it added.

While India faces some of the world’s highest U.S. tariff rates, listed corporates are largely domestic, with less than 4% of BSE500 company sales linked to U.S. exports. The pharma sector, most exposed to the U.S., is currently excluded from tariffs. Tariffs remain an overhang but are unlikely to materially impede growth, the report underlined.

Valuations look attractive on regional basis

HSBC said that valuations of Indian equities have come down significantly, both historically and relative to other major Asian peers like mainland China, making them less of a headwind than a year ago. Given strong domestic demand, a decline in multiples to average EM levels seems unlikely, it said.

The 2025 price-to-earnings (PE) ratio currently stands at 25.3x, declining to 22.0x in 2026. Price-to-book (PB) ratios are projected at 3.64x for 2025 and 3.26x for 2026, while dividend yields are expected to edge higher from 1.3% in 2025 to 1.4% in 2026, as per the report.

“A fall in multiples to average EM levels is unlikely, given the strong domestic demand. On a relative basis, we think India is starting to offer value vs the rest of the region,” the report noted.

The growth recovery is likely to be gradual, but the risks are reflected in valuations, it said. Although consensus earnings forecasts for 2025 have been revised down to 12%—with further moderation to 8–9% expected—2026 estimates of 15% remain optimistic. However, the low base and policy support have tempered the risk of sharp downgrades.

The report estimates earnings growth to recover gradually, with Sensex constituents projected to see 11.8% growth in 2025 and 15.1% in 2026. Return on equity (ROE) is estimated at 14.4% in 2025, rising to 14.9% in 2026, while return on assets (ROA) is expected to improve from 7.4% to 8.0%. The net debt-to-equity ratio for non-financial companies is pegged to decline from 26.3% in 2025 to 21.3% in 2026.

HSBC also notes that the mainland China rally poses little threat to Indian equities, as both markets are driven primarily by local investors with limited foreign participation. Despite significant foreign fund withdrawals over the past 12 months—during which the Indian market underperformed—local investors have remained resilient.

So far in 2025, foreign institutional investors (FIIs) have sold Indian equities worth ₹1,80,443 crore, including ₹11,169 crore in the first half of September. On the other hand, domestic institutional investors (DIIs) have continued their support for Indian equities, with net investments of ₹27,147 crore so far in September. Overall, they have infused more than ₹5 lakh crore into the market in CY25, remaining net buyers in all eight months this year.

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