Global financial services major HSBC has downgraded Indian equities from ‘overweight’ to ‘neutral’ citing that the country would struggle to defend a falling currency and declining growth.
"We lower our weighting in India from overweight to neutral. In our view, India will continue to struggle with the trade-off between defending a currency and supporting growth," HSBC said in a research note on Friday.
According to HSBC, the volatility in Indian markets since May can be attributed to the initial talk about tapering of bond purchase by the US Federal Reserve but the catalyst for recent volatility in Indian equities was when policymakers decided to tighten liquidity to stem capital outflows.
Since the beginning of the current fiscal in April 2013, though the rupee valuation of Indian stock market has fallen by 6.55 per cent, its dollar valuation has plunged 22 per cent.
The rupee has depreciated by over 16 per cent during this period.
". . .the issue is that in many cases the authorities have taken only incremental steps to improve financing of the current account deficit in recent years. In India, the lack of structural reforms is well documented," it said.
According to the report, India faces the most difficult situation as the country's growth is slowing, inflation remains elevated and it has a sizeable current account deficit.
"It is the 'impossible trinity' -- a country cannot have both in the current environment. Growth will likely suffer," HSBC said.
The report further noted that the current inflation situation is also not helping.
Imported inflation will further reduce the possibility of looser monetary conditions in the near future.