HSBC lowered its December 2008 estimate for the Sensitive Index, or Sensex, to 14,000 from its previous estimate of 17,500. It also reduced its end-2009 target by 29 per cent to 15,000. The gauge closed at 13,525.99 yesterday.
"There is risk of the price-earnings multiple contracting in the case of further monetary tightening,'' Garry Evans, Hong Kong-based Asian strategist at HSBC, said in a note to clients today.
"Analysts have yet to meaningfully downgrade earnings per share forecasts; this may happen after quarterly results are announced later this month.''
India's central bank increased its benchmark interest rate twice last month and signalled it is prepared to act further should prices gain at a faster pace.
The Reserve Bank of India (RBI) raised its overnight lending rate by 0.5 percentage point on June 24, the most since 2000, to 8.5 per cent as the inflation rate tripled this year. Policy makers are scheduled to meet on July 29 to review interest rates.
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HSBC suggests avoiding financial companies and utilities. The bank recommends buying industrial and telecommunication shares.
The Sensex has dropped 36 per cent from a record of 21,206.77 on January 10.