BENGALURU India's benchmark BSE Sensex index of leading shares will gain nearly 3 percent by the end of this year, with a strong likelihood of hitting a new record high next year, according to analysts polled by Reuters.
Indian shares fell over 400 points last week amid rising tensions between India and Pakistan, the biggest fall since Britain's vote in June to leave the European Union briefly drove investors out of emerging markets.
Still, the government's recent Goods and Services Tax bill and a stable economic and inflation outlook after good monsoon rains have driven expectations that India's equity market will attract foreign investment over the coming year.
The BSE Sensex, which is up over 8 percent so far this year, is forecast to rise nearly 3 percent to 29,000 by the end of December from Monday's close, the poll of more than 40 specialists taken in the past week found.
They gave a median 80 percent chance that the Sensex would hit a new peak over the coming year. It is forecast to reach a record high of 30,400 by mid-2017, and then rise further to 32,000 by the end of next year.
Similar gains are expected for the broader NSE Nifty, which will likely rise to 9,000 by end-2016 and 9,350 by June next year.
"The impact of good monsoons and low inflation will help India stay as one of the preferred investment destinations," said Neeraj Dewan, a director at Quantum Securities.
Indian shares are also forecast to weather the impact of rate hikes from the U.S. Federal Reserve, which is widely expected to pull the trigger in December after November's presidential election.
An overwhelming majority, 20 of 21 analysts, said a victory by Democratic candidate Hillary Clinton in the U.S. election would be the most positive for Indian stocks between the vote and the end of the year.
While global risks to financial markets remain, the Indian government's drive and ability to pass key reforms should make India a safe bet, analysts said.
India's growth rate of 7.1 percent in the April-June quarter was the fastest among major economies.
The GST bill, which received parliamentary approval last month, could also add to India's growth but that may well depend on the eventual tax rate.
Indian shares could also get a boost from expectations for more policy easing - most likely by the end of the year - from the Reserve Bank of India (RBI).
India's newly minted monetary policy committee delivered a surprise 25-basis-point cut in the repo rate to 6.25 percent on Tuesday, as RBI Governor Urjit Patel presided over his first policy review since his appointment last month.
(Polling by Khushboo Mittal; Editing by Kim Coghill)