Nomura expects the Sensex to touch 21,700 by the end of 2013. The investment bank says positives include potential rate cuts, easier domestic liquidity and reform momentum.
However, Nomura warns risks include "a broken" capital expenditure cycle, weak government finances, and a poor external account. Nomura sees downside risks to consensus forecast of 13 per cent earnings growth for financial year 2014, adding it expects at most a 10 per cent growth.
The Sensex is trading at 13.8 times, or a 10 per cent discount to its three-year average, Nomura adds, noting that "is about right given the market's adverse macroeconomic ecosystem and high systemic imbalances - slow growth, high twin deficits and a weak rupee".