Stocks will continue this year's big rally in 2015, propelled by the passage of key fiscal reforms, according to analysts in a Reuters poll who see another year of 20 per cent-plus gains.
The poll of 18 analysts, taken in the past week, predicts the Sensex will hit 30,000 by June and 32,980 by December 2015. The index - which closed at 26,781.44 on Tuesday - has gained around 27 per cent this year, trumping most major indices.
The implementation of long-delayed reforms by the government should ensure the rally continues, analysts said.
A proposal for a nationwide goods and services tax (GST), first mentioned in the 2009 budget, has been on ice as some states were reluctant to enact it, fearing a loss in local revenue.
But the GST, likely to boost gross domestic product by simplifying taxes and broadening the tax base, is expected to take effect in 2016 after Finance Minister Arun Jaitley struck a deal on Monday to compensate states for losses.
Another long-awaited reform that will be enacted next year permits 49 per cent foreign equity ownership in insurance companies - a move that should boost investment.
"The insurance bill and GST will have the biggest impact on stock market next year," said Mangesh Kulkarni, research analyst at Almondz Global Securities in Mumbai.
"The biggest boost will be GST, which will push up manufacturing and consumption and give a big lift to GDP numbers. Clearance of various FDI proposals will start stable capital flows in the country."
Foreign investors have pumped Rs 82,200 crore ($12.9 billion) into stocks so far this year, compared with last year's purchases of over Rs 1 trillion.
While fiscal reforms are expected to attract more investments in the long-term, analysts said a few near-term risks could dent a rally in the Sensex.
Over the past year, there has been a disconnect between a stumbling economy and the stock market, which continues to soar despite lackluster growth.
Economic growth slowed to 5.3 per cent in July-September from 5.7 per cent in the previous quarter and is nowhere close to the 8 per cent that Prime Minister Narendra Modi is eyeing to create jobs.
The Reserve Bank of India could cut interest rates early next year, but only if inflation - which has eased due to falling oil prices - continues to cool.
"Rajan gave a statement in the last policy meeting about cutting rates if it's required. But the RBI might not cut rates because of widening trade deficit, the dollar strength against emerging market currencies and weakening rupee," said Rudramurthy B.V., managing director at Vachana Investments.
Trade deficit widened to $16.86 billion in November, an 18-month high, and the rupee, one of the most stable emerging market currencies this year, has weakened around 4 per cent against the dollar in the last month.
Significant global worries that could foster a correction in the index include hawkish monetary policy action from the US Federal Reserve, which has the potential to withdraw some of the capital that emerging markets attracted in the last two years.
Although the Sensex has outperformed peers in China and Brazil this year, a slowdown in the Chinese economy could hurt stocks globally.
"We believe disruption in China's economy and a sharper-than-expected rate hike (from the Fed) are two major downside risk factors to global equity markets," said Deven Choksey, CEO of KR Choksey, an investment firm in Mumbai.
($1 = Rs 63.6450)
(Polling and additional reporting by Kailash Bathija)
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