Morgan Stanley cuts India stock market growth projections

Reacting to the Reserve Bank of India's money-tightening measures last month, Morgan Stanley has cut its forecast for growth in the stock market.

The RBI's measures to prop up the sinking rupee have made Indian shares much more vulnerable to global cues, especially the expected tapering of US monetary stimulus.

"As RBI's moves echo into the economy, we believe that share prices in India are likely to fall led by banks," Morgan Stanley said in a note on Wednesday.

Although it maintains 'equal-weight' rating on the Indian market, it has slashed Nifty and Sensex year-end targets.

Morgan Stanley cut its bear-case scenario index target for the BSE Sensex to 16,200 from 17,912 while raising the probability of such a scenario to 35 per cent from 20 per cent.

 The bank maintains its base case target at 21,500 points, with a 60-per cent probability, while maintaining its bull case target at 23,000 points, though reducing the probability of that scenario to 5 per cent from 20 per cent.

"Our earlier expectation was that the Nifty would trade in the 5,600-6,300 range, but last week's policy guidance and dovish signals may take a toll on the market, led by financials," Morgan Stanley said in a note on Wednesday.

Attractive valuations and sentiments might be able to protect the downside, but draining global and local liquidity and fresh growth uncertainty will likely cap the upside in markets, it said.

The sudden weakness in the Indian rupee has rattled markets over the last two months or more, pushing benchmark indices further in red. Both the Sensex and the Nifty indices have plunged over 3 per cent so far this month, as of data collected by Reuters on 7 August.

The rupee's depreciation is hurting confidence of investors not just in India but abroad too at a time when India is struggling to mange 5 per cent GDP growth. Foreign investors have pulled out Rs62,000 crore from the Indian capital market in the past two months.

India's GDP growth was below 5 per cent during the quarters ending December 2012 and March 2013, and is unlikely to have increased during the quarter ending June 2013.

"A weak growth trend lasting for 4-5 quarters would increase the risk of a vicious cycle building, whereby the economy becomes vulnerable and the risk increases of GDP growth sliding to 3.5-4 per cent," said the Morgan Stanley report.

If currency depreciation pressures continue to rise, the global investment bank expects the government to augment capital inflows in some form of dollar debt.