By Rahul Karunakar and Kailash Bathija
BENGALARU (Reuters) - The BSE Sensex is set to rise slightly over the next year but remain well below the record highs expected just three months ago, a Reuters poll found.
Tracking the sell-off in global stocks, Indian shares have lost about 9 percent since August and are nearly 7 percent lower so far in 2015.
The poll of more than 35 equity analysts conducted over the past week forecast the Sensex would rise slightly to end this year at 27,500 and reach 29,000 by mid 2016. The index closed on Monday at 25,616.84.
A similar poll in June had foreseen the index hitting record highs by the end of both periods. Although equity analysts are generally bullish on India, the rise now forecast for this year is the smallest in any Reuters poll.
The trimmed forecasts come despite expectations the Reserve Bank of India will cut its repo rate on Tuesday by another 25 basis points to stimulate the economy, which is usually good news for Indian shares.
Last year the Indian stock market rose almost 30 percent and was one of the best performers in the world. The BSE Sensex is forecast in the poll to hit a record high of 32,000 by end-2016, which would be 25 percent higher from where it is now.
Recent turmoil in financial markets on global growth fears, led by weaker-than-expected data from China, has pushed investors out of emerging markets, however, and put a dent in analysts' expectations for Indian shares.
That sell-off in emerging markets was one of the reasons why the U.S. Federal Reserve kept rates unchanged last week.
But expectations the U.S. Fed will raise rates this year and a lack of promised reforms from Prime Minister Narendra Modi's government has made foreign institutional investors to dump Indian shares.
"The policies (reforms) are holding out and the window for the government to act is getting narrower. It is clear that the world will not wait for India for too long," said Ambareesh Baliga, an independent market analyst.
A majority of analysts were of the view that key reforms like a goods and services tax and land acquisition bill will be passed, however, which should lift Indian shares over the coming year.
Modi, who took office in 2014 on promises of introducing reforms that were widely thought to be the missing leg of the Indian growth story, has so far failed to deliver. But 24 of 35 analysts expected the present government to pass those reforms.
RBI Governor Raghuram Rajan, who has cut interest rates three times this year to boost growth, stated in an interview that India is in a better position to withstand a Fed rate hike compared to any other emerging economy.
Indeed, a majority of the analysts polled expect stock markets in China and Brazil to be the most vulnerable to such a move, which Fed Chief Janet Yellen has signalled is coming this year but which many in financial markets still doubt.
Indications of relatively good economic growth compared to that of rival countries will make India more attractive to foreign and local investors, analysts said.
The economy grew 7 percent in the three months to June this year, similar to China. But recent data shows China is slowing down much more sharply than previously expected.
That should help Indian shares but a lot would depend on the ability of the government to push through key reforms.
(Polling by Kailash Bathija; Editing by Catherine Evans)
