India's main stock index is headed for its second annual decline in a decade as persistently high inflation, rising interest rates and slowing growth keep investors at bay, a Reuters poll showed. The 30-share BSE Sensex is already down more than 13 percent year-to-date, making it the worst performer among its peers in emerging markets.
Analysts expect a pullback in the second half if monsoon rains, a lifeline for the Indian economy, are bountiful but this would still not be enough to lure back investors in droves and wipe off the year's losses.
The median forecast of 18 investment houses, brokerages and research firms taken over the past week, sees the benchmark at 19,750 at end-2011 and at 21,500 by next June. The index closed 2010 at 20,509.
If the Sensex drops in 2011, it would be the first fall since 2008 when it slumped 52.5 percent, and the findings are more pessimistic than the poll conducted three months ago, where participants expected the Sensex to close 2011 at 20,500. But this translates to a predicted 11.4 percent gain by year-end from Thursday's close of 17,727.5 and a 21.3 percent rise a year from now.
The most recent poll saw the third downgrade to end-11 forecasts with 11 of the 14 common contributors from a poll taken in March downgrading their targets for the end of this year.
"India's growth story is under threat," said R.K. Gupta, managing director of Taurus Mutual Fund. "The RBI has already indicated they are more concerned about inflation and they don't mind dealing with it at the cost of growth."
The Reserve Bank of India (RBI) has been the world's most aggressive central bank to combat stubbornly high inflation in Asia's third-largest economy. It has raised rates by 275 basis points over 10 moves since mid-March 2010. Still, annual inflation in May was more than 9 percent, well above the central bank's comfort zone of 4-4.5 percent, meaning there will be more rate increases coming.
The tightening has dented growth, with January-March economic expansion at 7.8 percent, the slowest rise in five quarters and the fourth consecutive slowdown in activity.
Many forecasters have lowered their growth expectations this year for India, with Goldman Sachs cutting its outlook in April to 7.8 percent from 8.7 percent. Cooling growth has triggered an outflow of around $450 million in foreign portfolio investments from equity so far this year, compared with record inflows of $29.3 billion in the whole of 2010.
Asked if he saw foreign fund buying reviving in the second half, Gupta said: "I am afraid, no." Global investors are shying away from riskier emerging markets and moving to beaten-down developed economies that look a better bet for returns.
Out of 14 respondents who answered an extra question relating to Indian stocks' performance in comparison with their emerging market peers, nine expected their situation to improve.