Sensex seen touching 19,300 by year-end

India’s benchmark sensitive index Sensex, which has already risen 15 per cent so far this year, may add another 10 per cent and is likely to touch the 19,300-level by the end of this year, says a research report by HSBC.

HSBC has upgraded India to overweight on the basis of easing monetary policy, and the country’s favourable valuations and long-term growth potential, but has ranked it behind China and Taiwan.

“Slowing momentum of earnings cuts and looser monetary policy make us constructive,” the report said, adding that it has upgraded the country to overweight within Asia and has set the year-end target for Sensex at 19,300.

Historically, it is seen that there has been a strong correlation between the Sensex and FII flows, accordingly strong FII flows have lifted the Indian market 15 per cent so far this year despite week domestic cues.

FIIs have invested $8.9 billion in the first quarter of this calender year, the highest in the first quarter of any calendar. However, HSBC noted: “FII trading volumes crashed following the finance minister’s introduction of General Anti-Avoidance Rule (GAAR) in the 2012 Indian budget.”

The new GAAR set to pass with the Union Budget in May proposes taxing outflows of capital routed via tax havens, a key risk for the market, HSBC said. “Increased uncertainty about tax issues and India’s near-term growth prospects could result in outflows; especially when we have seen more than $8 billion invested in the first quarter itself,” the report said.

Another concern for the Indian stock market include the country’s balance of payment situation, which makes it vulnerable to capital flows, it said.

Meanwhile, the government’s recent efforts to spur foreign direct investment (FDI) in aviation and its directives to ensure revenue-neutral electricity tariffs should help improve cash flows in power and aviation.

Going forward sectors like exporters and those that are likely to benefit from monetary easing looks bullish. Besides, those segments that play an important role in the country’s long term story also looks robust.

Regarding monetary easing, HSBC noted that there is still room for another rate cut of 25 basis points in this fiscal year. In its annual monetary policy statement for 2012-13, RBI, after a gap of three years, cut interest rate by 0.50 per cent making credit cheaper. RBI had hiked policy rates 13 times between March, 2010 and October, 2011 to control high inflation.