India better placed amid AI-driven market volatility; FII inflows may reach $25 billion: HSBC

India's equity market is better positioned than several Asian peers as heightened volatility in AI-linked sectors prompts global investors to diversify their portfolios, according to a report by HSBC Global Investment Research.

The brokerage noted that Korean equities have been nearly four times more volatile than Indian stocks so far this year, making India an attractive destination for investors seeking stability. However, it cautioned that geopolitical developments in the Middle East and the US Federal Reserve's monetary policy remain key risks for regional markets.

FII inflows could rebound

According to HSBC, foreign institutional investor (FII) outflows linked to the rotation away from AI-driven markets have largely run their course. It estimates that if active Global Emerging Market (GEM) funds, more than 80% of which remain underweight on India, move back to a neutral allocation, it could generate nearly $25 billion in fresh inflows into Indian equities.

Foreign investors have already purchased around $3.6 billion worth of Indian equities since mid-June, when Indian markets began outperforming the broader Asian region. HSBC said that with domestic institutional demand remaining resilient, even moderate but consistent foreign inflows could provide meaningful support to the market.

Improving fundamentals support outlook

The report highlighted that India's macroeconomic fundamentals have strengthened, supported by robust economic growth and encouraging corporate earnings.

HSBC noted that after a strong March quarter, around 73% of companies reporting first-quarter FY27 earnings have either met or exceeded expectations. Consensus earnings estimates for the full fiscal year have been upgraded across commodities, financials, industrials and consumer staples.

High-frequency indicators, including credit growth and consumer demand, continue to remain resilient, while recent policy measures by the Reserve Bank of India (RBI) are expected to support the rupee. Although some earnings downgrades may emerge later in the financial year, HSBC expects investors to look beyond them.

Reflecting the improving outlook, HSBC recently upgraded India to 'Neutral' within its Asia equity allocation.

Preferred sectors

HSBC continues to favour high-quality growth companies with strong domestic demand exposure, particularly in financials, automobiles, retail, hospitals and selected industrials.

Among financials, the brokerage sees value in private sector banks, diversified non-banking financial companies (NBFCs) and real estate developers following a period of underperformance. It also prefers consumer discretionary over staples, citing richer valuations for staples and greater exposure to rural demand and food inflation.

Within industrials, HSBC remains positive on companies benefiting from government policy support and structural themes such as data centres, electrification and semiconductor manufacturing. It also prefers aluminium as its top commodity play, supported by China's production capacity limits and steady global demand.

India outperforms regional peers

Indian equities have gained around 6% since mid-June, outperforming the broader Asian region despite elevated US bond yields and persistent geopolitical tensions in the Middle East.

HSBC said the sharp swings in AI-focused markets have reinforced the case for global investors to diversify, with India emerging as one of the key beneficiaries. The firm added that strong momentum in high-frequency indicators, including credit growth and automobile sales, alongside a healthy start to the FY27 earnings season, continues to support the country's equity market.

While the brokerage sees valuations becoming more attractive in the Indian IT sector following a recent rebound, it remains cautious due to ongoing concerns around global pricing pressures and limited near-term upside.