Amid concerns over a slowdown in economic expansion, a research report has said that a fall in the growth rate to 7% could drag the stock market benchmark Sensex to as low as 14,500 points by next fiscal.
The report by global financial services giant Deutsche Bank, however, asserted that the long-term growth prospects of the Indian economy remained intact and an average growth rate of 8% was expected in the next two years.
But, factors like weakness in the investor expectations for the country's economic expansion and corporate earnings growth could nudge the investment community into a cautious posture.
Seeking to evaluate the impact of any slowdown in economic growth rate on the stock market, Deutsche Bank said that a fall in GDP growth rate to 7% in the next fiscal (FY12-13) would result in a corresponding fair value range of 14,500-16,000 for the BSE Sensex.
The Sensex is currently trading near 17,500-point level and has not slipped below 15,000 points for more than two years, or since August 2009.
The index had traded over 21,000-points in November 2010, but has been sluggish for past few months and touched its 52- week low of 15,745.43 points about a month ago on October 4.
The country's economic growth has averaged 8.4% over the past five years. Barring the global financial crisis period of 2008-2009, the average growth rate for past five years has been 9%.
Deutsche Bank said that India's position as one of the most rewarding market across the world in the past five years could see some value-erosion in the event of slower GDP growth and declining corporate earnings growth rates.
"Over the past few months we have seen a 260 basis points compression in India's PE (price-to-earnings) valuation, driven by rising risk aversion (due to global factors) and worries over policy uncertainties," it added.
The market has witnessed heavy volatility in recent past and the Sensex has registered a dip of over 14% so far this year and has fallen by about 17% from its 52-week high of 21,108.64 points scaled on November 5, 2010.
Deutsche Bank said that the risks were growing for a slowdown in the country's medium-term economic growth trajectory towards 7%, due to concerns over policy uncertainties, conflicting demands and compulsions of a popular democracy and India Inc's growing despondency.
However, these risks would decline considerably if global commodity prices cool down and policy actions are undertaken for addressing supply-side bottlenecks in coal, preventing any runaway increase in fiscal deficit and there was an improvement in India Inc's business confidence and inclination to invest.