Sensex seen up nearly 17% at 19,250 by end of 2012

NEW DELHI: India's main stock index should rise almost 17 percent by the end of next year as investors bet on a possible cooling off in inflation and a reversal in the interest rate tightening cycle in Asia's third-largest economy, a Reuters poll showed. 

The main 30-share BSE index will likely rise to 19,250 points by end-2012 from Thursday's close of 16,483.45 points, according to the median forecast from a Reuters poll of 20 market participants. 

The index should rise over 9 percent by mid-2012 to 18,000 points, the poll conducted over the past week showed, lower than the 19,500 level seen in a September poll. 

Indian shares are down about 20 percent this year to be among the world's worst-performers as a string of interest rate increases to reduce high inflation have started to eat into company profits, while slowing local growth and the European debt crisis have forced foreign funds to cut inflows. 

A fall in the main index this year would be only the second annual decline in a decade. Data on Wednesday showed India's economy grew at its weakest pace in more than two years in the September quarter. 

A slide in the local rupee currency has also added to worries as it raises the cost of imports and also increases the debt-servicing cost on foreign loans. The rupee has slumped more than 14 percent against the dollar this year, with most of the losses coming in the last three months. 

"It appears that probably the worst is over," said R.K. Gupta, managing director of Taurus Mutual Fund in New Delhi, who expects the benchmark index to reach 19,000 points by mid-2012 and 20,000 by the end of next year. 

"We believe that the interest rates have already peaked and you could see a reversal from March onwards and the rupee should see some improvement from January onwards." 

A domestic consumption-led growth story in the world's second-most populous nation of 1.2 billion people has lured foreign investors over the past years to pour in money into local equities. 

This year, foreign funds have been net sellers of about $492 million of Indian shares, compared with a record net buy of $29 billion in 2010. 

"Once the European crisis is settled, and with the US showing signs of improvement, we think India provides a very good platform for foreign investors and there should be a bounce back in inflows," Gupta said. 

Driven by high food and global commodity prices, India's headline inflation in October hovered above 9 percent for the 11th month, despite a 20-month rate tightening cycle that has seen the central bank increases interest rates 13 times since March 2010. 

The central bank has lowered the country's growth forecast to 7.6 percent for the current fiscal year ending in March from 8 percent previously. Also, the government has been hit by a spate of corruption scandals, paralysing policy-making.