Key Points

Sentiment has improved significantly, and the Indian markets are well placed amid global uncertainty and trade tensions.

"As per our proprietary positioning data, Asia and global emerging market (GEM) funds have started to rebuild positions in India (that is, cut their underweights), but global investors are still cautious. A weaker dollar and softer inflation suggest the foreign inflows can persist in the coming months," the HSBC report noted.

The Central government and the central bank are both providing policy support. Government capex surged to a record high in Q1 2025, while the Reserve Bank of India (RBI) has adopted a more pro-growth stance than anticipated.

This is evident from the recent larger-than-expected cuts in the benchmark rate (50bps) and cash reserve ratio (100bps). This should bode well for domestic growth. Stable inflows from domestic investors provide another key support to equities, according to the report.

Earnings growth in Q1 came as a surprise. Industrials, healthcare and telecom reported strong growth. Consumer discretionary saw EPS grow 14 per cent on the back of strong numbers in retail and services.

"Despite the beat in Q1, we believe a sustained recovery in earnings growth is still a few quarters away," the report noted.

Indian equities rebounded notably in the past few weeks on the back of lower domestic bond yields, now down to a 3-year low. Lower local bond yields are very supportive of local equities.

"In this environment, we prefer stocks that we believe offer good growth, preferably for structural or idiosyncratic reasons," the HSBC report said, adding that they are "neutral on India from the Asian perspective with the 2025-end index target of 82,240 for the Sensex".

- IANS