Indian stocks will hit a record high this year on looser monetary policy and fiscal reforms, but concerns over a widening budget deficit could limit the upside, a Reuters poll predicted.
The benchmark BSE index is expected to rise 13 percent over the rest of 2013, half of the 26 percent surge last year, according to the median forecast of 20 equity analysts polled over the past week.
Indian stocks, among Asia's top performers in 2012, are trading flat this year, not have benefitted like others from cheap money being pumped out by major central banks.
Worries about an economy growing at its slowest pace in a decade and disappointing earnings have dented optimism in a country with high fiscal and current account deficits.
Despite that, the Sensex will hit 20,500 by June and to 21,875 by the end of this year, surpassing a record high of 21,206.77 from January 2008, the poll showed.
The consensus for end-2013 was lower than December's prediction of 22,250, though only three in the poll expect the index to end this year below Monday's close of 19,293.
The poll was conducted before the Reserve Bank of India cut its key repo rate by 25 basis points on Tuesday to help revive flagging growth.
"We have already entered a phase where interest rates and inflation will come down, the two things that are very significant for emerging markets," said Neeraj Dewan, director at Quantum Securities.
Although the RBI has cut interest rates twice this year, a recent uptick in headline inflation and record-high current account deficit may limit its scope.
The government's budget for the 2013/14 fiscal year unveiled last month has also sparked concerns it relies on increased tax revenues and stronger growth to help narrow the country's twin deficits.
While those worries could weigh on Indian shares, they will not trigger a credit ratings downgrade this year, according to all 12 analysts who answered an extra question. Standard & Poor's and Fitch cut their outlooks to "negative" last year.
Foreign institutional investors pumped a little over $24 billion into Indian equities last year, and a majority of the analysts in the poll expect similar inflows this year.
Six of 12 analysts said portfolio inflows this year will be higher than last year, three said it will be more or less the same, while the remaining three said it will be lower.
Eleven of 12 in the poll expect India to announce more fiscal or economic reforms, such as relaxing caps on foreign investments for other sectors.
While those measures may help lure foreign investors, weaker economic growth has been reflected in company earnings and weighed on the overall index so far this year.
Phani Shekar, a fund manager at Angel Broking, said earnings would need to improve for markets to sustain any gains.
"Now the market is adjusting to the new reality that, ultimately, unless and until you get earnings growth the markets rally cannot be justified," Shekar said.