Foreign investor selling and rising global bond yields are expected to remain challenges for Indian financial markets. However, HSBC Mutual Fund believes a recovery in corporate earnings could help drive equity market returns in the near term, even as international uncertainties persist.
In its equity and debt market reviews, the fund house highlighted the impact of geopolitical tensions, higher crude oil prices and tighter monetary policies on Indian markets. It said the direction of corporate earnings, private investment and global financial conditions would be important in determining the market outlook.
Indian Stock Market Performance and FII Outflows
Indian equities experienced a broad-based correction in September as crude oil prices increased, tensions in the Middle East resurfaced and major economies maintained tighter monetary policies.
The Nifty 50 fell 6% during the month, while the Nifty Midcap 150 declined 7.1% and the Nifty Smallcap 250 dropped 3.1%. Among the major sectors, information technology stocks recorded the steepest fall of 11%, followed by automobile stocks, which declined 9%.
Foreign institutional investors (FIIs) withdrew $4.1 billion from Indian equities in September, reversing the $2.4 billion of inflows recorded in August. Their total selling in Indian equities during 2026 reached $28.3 billion, according to the report.
Domestic institutional investors provided support to the market by remaining net buyers. They invested $8.1 billion in September, helping offset some of the selling pressure from overseas investors.
Corporate Earnings Could Drive the Equity Market Outlook
Despite the recent correction, HSBC Mutual Fund remains positive about the longer-term outlook for Indian equities. The fund house identified a potential recovery in corporate earnings, increased private investment and possible trade agreements with the European Union and the United States as factors that could support the market.
It expects earnings growth to play a central role in determining equity returns in the near term, particularly while global uncertainty continues.
The report also noted that the Nifty 50 was trading at 17 times its one-year forward earnings, approximately 13% below its five-year average valuation. This indicates that market valuations have moderated compared with their longer-term average.
However, higher global bond yields and rising commodity prices continue to pose risks. Brent crude oil prices climbed 14% in September, adding to concerns about inflation and financial market conditions.
HSBC Flags Inflation Risks and Possible RBI Rate Hikes
In its debt market review, HSBC highlighted the Reserve Bank of India’s October 7 rate increase to 5.50% and its shift towards calibrated tightening. According to the fund house, these steps reflected growing inflation risks linked to elevated commodity prices and deficient monsoon conditions.
HSBC expects the repo rate could rise further to 6% if inflation pressures intensify or global interest rates remain elevated.
The outlook for the debt market remains challenging, but the fund house said bond valuations were becoming more attractive after a significant increase in yields. It would consider increasing the duration of its debt portfolio if US Treasury yields or crude oil prices show a sustained moderation.
The report suggests that the direction of interest rates, inflation and international bond yields will remain important for investors in the coming months.
What Could Shape Indian Markets in the Coming Months?
According to HSBC Mutual Fund, the performance of Indian equities will depend on several factors, including the pace of corporate earnings recovery, a possible revival in private capital expenditure and movements in global bond yields and crude oil prices.
Domestic inflation trends will also be important, particularly if higher commodity costs increase pressure on monetary policy.
While foreign investor outflows and global uncertainty remain significant challenges, the fund house expects improving corporate earnings to be a key potential source of support for equity returns. Developments in international markets and the domestic economy will help determine whether this recovery translates into stronger market performance.
Disclaimer: This article is intended for general informational purposes only and should not be considered investment advice or a recommendation to buy or sell any security or mutual fund. Market conditions, interest rates and investment returns can change, and past performance does not guarantee future results. Investors should review official fund documents and consult a qualified financial adviser before making investment decisions.
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