Global brokerage major HSBC has upgraded Indian equity markets to "neutral", saying "green shoots" are emerging and has increased its Sensex target for the year to 26,000 from 25,000.

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According to the financial services major, Indian equity market has underperformed and its premium to the rest of the region is shrinking. Moreover, macroeconomic data like PMI and auto sales suggest the earnings environment might improve.

"We raise India to neutral in an Asian context. We raise our 2016 Sensex target to 26,000 (from 25000)," HSBC said in a research note.

Investors have been hoping for a cyclical recovery since the summer of 2014 when Prime Minister Narendra Modi came to power, which has so far remained elusive. But things are starting to improve, the report said.

According to HSBC's industrials analyst, Ashutosh Narkar, "green shoots" are emerging, with high-frequency data improving over the past few months, including demand for cement, long steel consumption, and power. Commercial vehicle sales and construction equipment sales also suggest domestic demand is picking up.

Future direction of Indian equities will be determined by a confluence of how things shape up both in global markets and the trajectory of domestic demand, HSBC said.

Global factors that are likely to affect Indian equity markets include -- Chinese equities and the fact that BoJ may be nearing the limits of monetary policy.

The domestic factors to impact market movements include RBI monetary policy and domestic liquidity, HSBC said adding "pick-up in business demand and the transmission of monetary policy, rather than further cuts, will be the driver of Indian equities".

Sectorwise, the global brokerage has upgraded IT to 'overweight' and Industrials to 'neutral' and downgraded healthcare sector to 'neutral'.

So far this year the 30-share benchmark index Sensex has lost over 2.40 per cent or 627.97 points and is hovering around 25,597.12 points.