Indian stocks have seen their market capitalisation tumble by over $1.3 trillion since their peak last year. According to HSBC Research, risks that emerged when the markets were on a "tear" are still lurking around, although they have largely abated.
The brokerage remains 'neutral' on Indian equities as some signs are now "much milder" than a few months ago.
The benchmark NSE Nifty 50 and the BSE Sensex have fallen 16.2% and 15.4%, respectively, from the previous peak, triggering the worst fall since 2020. In the broader market, the Nifty Mid-cap 150 has fallen by 21.4%, while the Nifty Small-cap 250 is down 26.2%.
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Nifty 50 is trading at a price-to-earnings of 20.7 times, while the mid and small-cap indices are trading at 32.5 and 23.9 times, respectively.
The market cap plunge was mainly on the back of a record exodus by foreign institutional investors. In 2025 so far, global funds have net sold equities worth Rs 1.24 lakh crore, NSDL data showed.
In August 2024, when Indian stocks were hitting fresh peaks, HSBC highlighted 10 risks that could dent the record run. Even after the ongoing correction, analysts at HSBC consider the "risks still lurking in the market."
Decline in valuations, moderated risks of earnings downgrades, supportive regulation and falling inflation have significantly reduced the risks to Indian equities, HSBC said.
Risks To Indian Stocks
Continued market weakness poses risks to the sustainability of domestic inflows, HSBC said, adding that they see initial signs of discomfort.
New issuances exceed domestic demand, leading to oversupply. FII participation in the primary market is funded by selling in the secondary market, the report said.
Firms are facing rising competition from new entrants across various sectors.
Some of China stocks' rally is being funded by selling Indian equities. The tariff threat is mild, but indirect impact from yields and forex is a concern, HSBC said.
Credit costs are rising, growth in deposits is still weak, but liquidity conditions are likely to moderate, it said.
Public spending is not growing significantly, while private capex is yet to take off, HSBC noted.
Rural spending could improve in the coming months, while demand from urban consumers remains sluggish.
As equities fall and growth slows, so might plans for corporates to expand and their demand for credit.
Growth has slowed but valuations are now better aligned with peers.
Multiples could remain under pressure until earnings stabilise.
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