Morgan Stanley has downgraded Indian equities to equal-weight from overweight citing expensive valuations.

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"We move tactically equal weight on India equities after strong relative gains - we expect a structural multi-year earnings recovery, but at 24 times forward price to earnings, we look for some consolidation ahead of Fed tapering, an RBI (rate) hike in February and higher energy costs," the investment banking company said.

Morgan Stanley's downgrade follows similar moves by Nomura and UBS over expensive valuations. Indian stocks have strongly outperformed other emerging markets this year, with the MSCI India index up 27.53 percent, compared to a 0.65 percent slip in the MSCI Emerging Market index.

Morgan Stanley attributed the outperformance to bullish consensus earnings expectations and a "favourable" government reform agenda.

The brokerage had said in an earlier report that nascent signs of capital expenditure, supportive government policy and a robust global growth outlook may result in India earnings compounding at over 20 percent per year for the next three-four years.

"While the fundamental leading indicators are positive, we see valuations as increasingly constraining returns over the next 3-6 months," Morgan Stanley said.

-With PTI inputs

(Edited by : Anshul)

First Published:Oct 28, 2021 3:24 PM IST