HSBC further said that India has become the second most expensive and one of the most over-owned markets in Asia, after a strong rally on the back of reform optimism generated by the Modi government over the past one year.
In the first major downgrade for Indian markets in the past one year, global brokerage HSBC today changed its stance on the country to "underweight", saying corporate earnings may remain muted, monsoon could be weak and odds are against further rate cuts.
HSBC further said that India has become the second most expensive and one of the most over-owned markets in Asia, after a strong rally on the back of reform optimism generated by the Modi government over the past one year.
It upgraded its stance on markets like The Philippines and Hong Kong.
"We lower our equity market weighting for India from overweight to underweight. Also, we raise The Philippines to overweight from neutral and Hong Kong to neutral from underweight," HSBC said in a research note.
The downgrade comes at a time when Indian markets are already under acute pressure, primarily because of foreign investors turning heavy sellers on concerns related to the controversial MAT levy and delay in the ambitious indirect tax (GST) and land reforms.
"Indian equities rallied and with lack of momentum in other markets, both global and regional mutual funds built historically high overweight positions in this market by the end of 2014," HSBC said, adding that "we now challenge this position and recommend investors to underweight India (from our prior overweight position)".
The stock market benchmark BSE's Sensex, which had peaked above 30,000-points within months of the new government led by Prime Minister Narendra Modi taking over last May, has dropped more than 3,000 points from the high. Its gain in the past one year has more than halved to just about 2,000 points.
The down-rating is largely because there are "no signs yet of any recovery in India's capex cycle" and on top of this China's policy stimulus is likely to boost commodity prices, which is "negative for India".
Besides, there is little room for further rate cuts and as the 2015 El Ni?o conditions are firmly established, "this will be negative for India's rural, agricultural economy".
HSBC further noted that "the potential for more equity outflows has increased because foreign positions look stretched".
According to EPFR data, India is the most over-owned equity market in Asia by mutual funds. "As other markets become more interesting, India could be used as a funding market," it added.
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