Kolkata: Credit Rating Information Services of India Ltd (Crisil) has warned that Indian stocks are beginning to look expensive in a pan-Asian context and that a significant correction is likely by the end of the year.

The view expressed by the Crisil Centre for Economic Research may be seen in the context of steady escalation in the stock market indices, as seen in recent times and evident from large inflows into stock exchanges.

"We believe a correction is likely to take place in December," says Abheek Barua, a senior economist with Crisil, indicating that the market will probably behave cautiously from now. "There will be profit-taking at each up move."

The rating agency, in its midyear outlook for 2003-04, noted that the Indian bourses have been on a roll since April this year. Stocks of public sector units have led the rally following which economy-sensitive sectors such as banking took over.

Bullish moves were driven by an economy that was backed by improving corporate results. However, the information technology segment was faced with pressures on margins and an appreciating currency lagged behind in the early stages though positive news flows in more recent months led to some improvement.

"The rally was entirely driven by institutional investors with FIIs [foreign financial investors] taking the lead. FII interest in debt investment waned and was replaced by growing interest in equities... India was close to the top of the Asian emerging market league tables with only Thailand and Indonesia faring better," says Crisil.

In this context, however, the agency has underlined its feeling that the pace of the rally will "slacken" considerably going forward. In December, there will be the usual yearend profit booking by FIIs. An upside of around 10 per cent in equity indices from their current levels in the short run is expected.