Having lost over one-third of its value in less than six months, stock market seems to have more pain in store for investors with experts seeing the benchmark Sensex heading back towards 12,000 level in the next few months.
The continuing crude oil rally and unabated selling by FIIs are unlikely to let the market see a near-future uptrend, while domestic factors like inflationary pressures and rising interest rates are also playing spoilsport, analysts believe.
International brokerage and equity research major CLSA analyst and renowned portfolio manager Christopher Wood has told his clients in the latest June edition of his famed "Greed and Fear" report that the Senses dropping back to a 12,000 level could not be ruled out in the wake of surging oil prices and continuing selling activities by foreign investors.
"Certainly, a re-test of the 12,000 level on the Sensex cannot be ruled out in these circumstances. And that will be accompanied by a further weakening in the rupee," Wood said.
Striking a similar note, research and analytics firm Evalueserve's Chairman Alok Aggarwal wrote in a whitepaper that Sensex could drop to 12,000 level in the near term if the present financial crisis does not subside, crude oil continue to trade upward and FII outflow continue unabated.
"We now believe that the Sensex could drop to 12,000 in the near term, the Rupee could depreciate by another 5-6 per cent against the US dollar, and the GDP growth could slow down to approximately six per cent by the fourth quarter of this fiscal year," Aggarwal said.
Agreeing to the probability of Sensex falling to 12,000 level, domestic brokerage firm Asika Stock Brokers' Research Head Paras Bodhra said corporate earnings could also be a major driving factor in the coming months.
The Sensex can fall to 12,000 level during the next 3-6 months, but it depends on the corporate results season, Bodhra said, adding if the earnings turn out too bad then the index may drop to this level.
"It is quite a possibility, as macro problems may trickle down to micro levels, leading to a deterioration of fundamentals, he noted.
These projections are in sharp contrast to the Sensex seen heading towards 25,000-point mark till a few months ago when bulls were in the driving seat. If the bears keep extending their reign on the bourses and pull back the barometer to 12,000-level, it would wipe off all the gains recorded in about past two years ago.
The benchmark index Sensex had touched the 12,000 level for the first time in September 2006. However, amid a continuing bearish phase continuing for about six months now, the Sensex has fallen over 7,000 points from its all-time peak of 21,206.77 points, scaled on January 10.
It settled at 13,802.22 points on Friday after a 620-point fall amid concerns over surging crude oil prices and inflation.
CLSA's Wood noted in his 'Greed and Fear' report that a further rise in the oil price would continue to be particularly bad news for India, despite RBI's increasingly pre-emptive monetary tightening stance.
The RBI last week announced hike in the repo rate and the cash reserve ratio (CRR) by 50 basis points each to 8.5 per cent and 8.75 per cent, respectively. These steps are expected to suck out an estimated Rs 15,000-20,000 crore liquidity from the banking system and have been seen as a contributor to the recent fall in overall turnover in the equity market.
Some analysts, however, expect a drop in the Sensex to the psychological 12,000-level to trigger a strong buying opportunity for foreign investors.
"Any such decline to that level is viewed as a massive long-term buying opportunity in India and the rest of Asia," Wood said.
However, due to selling by foreign investors, a clear risk of a further move down to the 12,000 level on the Sensex still remains, given the parabolic oil risk, he added.
CLSA noted that a further rise in oil can only be bearish for the Asia-Pacific region, since there would be growing focus on the deteriorating terms of trade for Asian economies and the resulting need for higher interest rates to fend off potentially destabilising currency depreciation.
FIIs have, so far, sold a net USD 6.2 billion worth of Indian stocks this year, against a net purchase of USD 51 billion between the beginning of 2003 and the end of 2007.
"There is then clearly every risk that foreigners sell more," CLSA said.
It, however, ruled out that the Indian stock market would underperform dramatically from the current levels as RBI has become more proactive than some other Asian central banks which may have to play catch up.