Has Dalal Street's near term outlook improved? HSBC lists 4 headwinds, 3 tailwinds to watch out for

The Indian stock market remained resilient despite global macroeconomic challenges, recording modest gains of 2% in July after a volatile month, and the near-term outlook is now improving, assuming no re-escalation of geopolitical conflicts, HSBC Mutual Fund said in its latest report.

HSBC expects India's investment cycle to be on a medium-term uptrend supported by government investment in infrastructure, support to manufacturing and pickup in private investments. It added that announcements of potential trade deals with the European Union and US should also support exports.

India’s corporate earnings recovery continues with strong Q1 FY27 results growth till date and more earnings beat than misses over consensus estimates, HSBC noted, adding that Nifty valuations are now in-line with 10-year average. "We remain constructive on Indian equities on a longer-term basis. Near-term outlook is now also improving assuming no re-escalation of geo-political conflicts," it added.


Explaining the macro-view, HSBC Mutual Fund said the re-escalations in the Middle East that effectively ended the interim ceasefire agreement spooked investors, while the disruption was compounded by a blockade in the Red Sea. With stable fiscal deficit for Q1 FY27, HSBC believes the government should be able to boost infrastructure spending in the second half of the ongoing FY27, although the full year may be flattish given the impact of the conflict on government finances.

Interest rate cuts by RBI, GST rate cut, and income tax rate cut announced by the Union government in FY26 should support consumption in FY27, according to the mutual fund house, which however noted that the risk of a below normal monsoon with negative consequences for food production and higher food inflation remains.

HSBC has listed 4 key headwinds to watch for Dalal Street’s trajectory in the future.

1) Global commodity prices

Benign global prices of crude oil and fertilisers have been a positive for India from inflation, fiscal deficit and corporate margins perspective in 2024 and 2025. However, HSBC said that these trends have now reversed due to geopolitical conflict.

This will likely be a headwind for India in 2026, according to the mutual fund house. This comes as oil prices remain elevated amid fresh escalations in the Middle East war, but sharply lower than the highs above $120 per barrel which were seen earlier this year during the raging war.

2) Weak global growth

Overall weak global growth is also likely to remain a headwind for India’s demand going forward, according to HSBC. It added that this is driven by a risk of tariffs, general policy uncertainty, mercantilist policies of certain countries and geo-political conflicts.

3) Below normal monsoon

Rainfall in July was 1% above the long-period average, but that recovery followed a severely deficient June. By July 31, cumulative rainfall since June 1 was still 12.6% below normal. While the trend is slightly changing, HSBC Mutual Fund said a below-normal monsoon can lead to higher food inflation.

This can have a negative impact on consumption and government budget, according to the mutual fund house.

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4) Sharp slowdown in government capex

Sharp slowdown in government capex was listed as another key prospective for headwinds for the Indian stock market.

Meanwhile, here are the 3 key tailwinds that HSBC sees for Dalal Street.

1) Corporate earnings recovery

Despite the latest worries around US-Iran tensions, the undertone of the market is mildly bullish, driven by the better-than-expected Q1 results. With the earnings season coming to an end this week, the vast majority of companies have reported earnings growth that has beaten expectations, according to analysts.

HSBC said that corporate earnings have seen consistent downgrades from the second half of FY25, driven by slowing government capex, liquidity tightening and consumption slowdown in key sectors. This was one of the key reasons for FII outflows over the past couple of years.

“With RBI’s regulatory easing, government measures on taxation (GST/ income tax) and lower tariffs by US, we see earnings growth recovering well,” the mutual fund house said.

2) Recovery in private capex

Industry capacity utilisation based on RBI survey data is at a reasonably high level and indicates potential for increase in private capex going forward, HSBC said while listing out a possible tailwind for the Indian stock market.

Also, it added that continued expansion of the Production Linked Incentive (PLI) scheme is likely to further increase private investments in targeted sectors. “We also expect higher private capex in renewable energy,” it said.

3) Trade deals

Potential trade deals with EU and US would be a tailwind for Indian manufacturing over the medium term and should encourage private sector investments, according to HSBC Mutual Fund.

It noted that Nifty now trades at 18.3x 1-year forward PE. This is now at a 6% discount to its 5-year average and a 2% discount to its 10-year average. IT, real estate and automobiles were named the best performing sectors in July. Healthcare also outperformed Nifty, while metals, FMCG, infrastructure, banks and telecom underperformed Nifty. Utilities, energy and industrials were the worst performing sectors.

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(With inputs from agencies)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)