The firm reduced its end-2025 target for the BSE Sensex by 5% to 85,990, suggesting a potential upside of 10% from the benchmark, which was trading at approximately 77,700 on Thursday.
In a note, HSBC commented, "The cyclical growth slowdown and high valuations have limited the near-term upside... (and) we anticipate subdued market returns in 2025."
Last year, both Goldman Sachs and Bernstein Quants lowered their ratings on Indian stocks, pointing to a decline in economic and corporate activity.
Nevertheless, some analysts remain optimistic. Brokerages such as Citi and Morgan Stanley project double-digit returns for Indian stocks, while Motilal Oswal anticipates robust corporate earnings growth in FY26.
In January, India projected a 6.4% annual growth rate for the financial year ending in March, marking the slowest pace in four years, primarily due to a weakened manufacturing sector and reduced corporate investments.
Following a series of record highs until September of last year, the Sensex and Nifty 50 index have retreated as foreign investors pulled back from overvalued domestic stocks after major companies reported their worst quarterly performance in over four years.
The benchmarks, which achieved their ninth consecutive annual gain in 2024, are currently trading about 10% below their peak levels.
HSBC noted that banks, which hold the largest share in India's listed companies, are facing challenges as stringent central bank policies have dampened credit demand.
The technology sector is also experiencing sluggish growth due to a slow recovery in international demand, and while rural consumption shows signs of improvement, urban demand remains weak, according to the brokerage.
Despite these challenges, Indian equities are relatively shielded from global uncertainties and may benefit from any shifts in trade policy under the incoming Donald Trump administration, HSBC added.