lately, HSBC is "overweight" on emerging markets within a global context.
"We are neutral on India in the regional context," HSBC Securities & Capital Markets India head of research Jitendra Sriram said in the research note, and has set a Sensex target of 21,700 for 2013 – 11% above the current level.
After reaching 20-month high on the first day of the new year, the Sensex on Wednesday shot up another 133 points to hit two-year high of 19,756.68, fuelling expectations that stocks may breach life-time high soon.
The Sensex had scaled all time high of 21,206.77 on January 10, 2008.
According to HSBC, India's equity market is "dancing to the tune of capital flows", thanks to high current account deficit, which has made markets sensitive to foreign direct investment (FDI) and inflows from foreign investors.
Positive flows not only help in improving the twin deficits, but also the sentiment towards rupee, which in turn, leads to a rise in 'hot money' flows into equities, and enhances equity market liquidity, HSBC said.
The recent reforms initiatives undertaken by the government to boost economic growth and investor sentiment have seen renewed interest by foreign investors who have made a net investment of Rs. 1.23 lakh crore during 2012 – the second-highest for a year and comes after a net outflow in the previous year 2011.
"With FIIs appearing to be already overweight on India, the scope for a further boost could be limited. It will, therefore, be important for the government to continue to open India up to greater FDI," the report said.
Projects such as the Delhi-Mumbai Industrial Corridor (DMIC) – funded by the Japan International Cooperation Agency (JICA) – and the Dedicated Freight Corridor (DFC), along with mobile telecoms spectrum sales and coal block auctions, could be key if they attract overseas interest.
"From a long-term perspective, we see government initiatives such as the opening of the retail sector to FDI, the formation of the National Investment Board and the auction of mobile telecom spectrum as encouraging for investment spending and FDI," HSBC said.
Meanwhile, raising the limits on foreign institutional investor (FII) participation in sovereign and corporate debt could boost short-term flows, it added.