MUMBAI (Reuters) - The BSE Sensex is expected to climb to a record high by the end of next year based on expected interest rate cuts and the government's resolve to press on with reforms, a Reuters poll showed.
The Sensex has rallied strongly since June, despite an economy headed for its slowest yearly rate of growth in a decade, stubbornly high inflation, and a record current account deficit.
The global economic backdrop has also been poor, with growth in many other emerging market economies slowing and tepid demand from the recession-mired euro zone and sluggish U.S. economies.
But the median projection of 20 equity analysts in a survey conducted over the past week showed the Sensex is expected to hit 20,500 by June next year, and rally to 22,250 by the end of 2013, surpassing a record high of 21,206.77 from January 2008.
The mid-year consensus is almost the same as the one taken three months ago. The market is up about 4 percent since then.
If the rally is sustained to the end of next year as projected, it would mark a 15 percent gain from Wednesday's close of 19,355.26, following a 25 percent rally this year. Only four respondents said the Sensex would not end next year at a record high.
Analysts say the market should reap the benefits from an economy helped next year by cheaper borrowing costs.
The Reserve Bank of India will cut its benchmark repo rate by 75 basis points next year to 7.25 percent, but will hold policy steady at its December 18 meeting, according to the latest Reuters poll.
"Key factors that will drive the index higher in 2013 range from a reversal in the interest rate cycle to the prospect of a rebound in growth," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.
The latest Reuters poll on economic outlook predicts growth will pick up to nearly 7 percent by the end of 2013.
Company earnings are also expected to improve. The average price-to-earnings ratio on the Sensex is expected to rise to 16, in line with the long-term average, from around 14.
That is high compared with regional peers. Goldman Sachs estimates Asia as a whole is trading at 11.6 times 12-month forward earnings.
Over $20 billion of foreign money has flowed into the stock market so far this year.
As the economy gains traction next year and foreign direct investment picks up pace, the beaten-down rupee will likely appreciate. That, in turn, could put a cap on expected gains.
The rupee has lost over two percent this year and was trading around 54.4 to the dollar on Thursday.
Sentiment in the equity market turned around this year on hopes the government would tackle key fiscal and economic reforms, prompted by fears of a sovereign rating downgrade.
In September, the government announced long-awaited measures such as further opening the retail and aviation sectors to foreign investors despite steep political opposition.
Only two of 13 analysts in the poll predicted the ruling coalition would have to call early elections next year, showing worries about political gridlock have eased significantly. The next elections are due in 2014.
Polling by Somya Gupta and Ruby Cherian in Bangalore; Additional reporting by Manoj Dharra in Mumbai; Editing by Helen Massy-Beresford