The brokerage has also raised its year-end Sensex target to 84,000 from 80,500, implying an upside potential of 8.3% from current levels.
Here’s what has changed.Strong capital inflows could improve liquidityAccording to Bhandari, the biggest positive is the surge in FCNR-related inflows following the RBI’s latest measures.
She said HSBC expects $60-65 billion of inflows over the three-month window, including FCNR deposits and external commercial borrowings. Those inflows should strengthen India’s balance of payments while increasing domestic liquidity once the RBI swaps the dollars into the banking system.
Bhandari said, “Once domestic liquidity increases, it’s generally positive for bonds, it’s positive for equities, maybe with a lag. And this is going to be a theme that will continue over August, and that makes us cautiously constructive.”
But the optimism comes with two important risks
Despite the improved outlook, HSBC is not ignoring the challenges. Bhandari identified two factors that could change the picture—crude oil prices and the RBI’s response to the incoming liquidity.
If oil prices rise well above $85 a barrel, it could hurt India’s macroeconomic outlook. At the same time, investors will closely watch how the RBI manages the additional liquidity. A gradual approach would be more supportive for financial markets than an aggressive withdrawal of liquidity.
Corporate earnings are looking healthier
HSBC also believes India’s earnings outlook has become more encouraging. Van Der Linde said earnings downgrades have eased, while recent high-frequency economic indicators have strengthened confidence that companies can deliver better results than investors feared earlier.Van Der Linde added, “It’s a tactical sort of move that we are making. It becomes more structural if we see that the earnings growth story is going to improve further in India.”
He stated that valuations have also become more reasonable after a period of foreign selling.
Foreign investors may have already done most of their selling
One reason behind HSBC’s upgrade is that foreign investors have already significantly reduced their India exposure.
According to Van Der Linde, there is now less room for additional selling. If regional fund flows begin rotating away from North Asia, India could attract part of that capital.
He stressed that the rotation has not happened in a meaningful way yet, but improving earnings and a more stable currency could make India an attractive destination.
What will HSBC watch next?
Bhandari said the next phase of India’s growth will depend on whether the services sector can pick up after manufacturing and exports carried the economy through recent quarters.
She said HSBC will closely monitor the HSBC Services PMI, credit growth, airline traffic and other transportation indicators to judge whether services activity is gaining momentum. Improved liquidity could also support financial services, one of the country’s largest contributors to GDP.
For the entire discussion, watch the accompanying video
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