Deutsche Bank cuts Sensex target to 25,000 on global cues

Global banking and financial services major Deutsche Bank has cut its December Sensex target to 25,000 from 27,000 and expects the remainder of 2016 to be highly uncertain on global headwinds.

"We expect the remainder of 2016 to be highly uncertain, which will keep markets volatile with a downward bias. We cut our December 2016 Sensex target to 25,000 (from 27,000 earlier)," Deutsche Bank said in a report.

"In the run-up to the end of the calendar year, we expect the flow environment to stay highly challenging with many uncertainties. These include the outcome of the Italian referendum on December 4, Fed meeting on December 15, a pace of outflows from China and the associated depreciation of the CNY (Chinese yuan)," it said.

The benchmark Sensex on Monday crashed 385 points to hit a six-month low of 25,765.14 following sustained foreign outflows amid uncertainty about the economic impact of the demonetisation move.

The report added: "In case the pressure on outflows from China increases as a consequence of Fed policy and President-elect Donald Trump's pro-growth policies, which would result in sharp dollar strengthening, we may see an acceleration in selling by foreign institutional investors who have been net sellers throughout November."

On the government's demonetisation move, it said, "While demonetisation will lead to medium-term demand contraction, we strongly believe that the government's policy bias remains growth focussed. We see a high probability of the government following through with a growth boost in the form of a stimulus which will be articulated in the forthcoming Union budget."

The bank said it is supportive of the government's demonetisation programme even though that is "disruptive for both the economy and medium-term corporate earnings".

"In the near term, discretionary spending and sectors reliant on the cash economy will see a sharply negative impact," the report noted.

"We may even see autumn harvest and winter crop sowing to be impacted, which may lead to a slower than anticipated growth in agricultural production which could impact the macroeconomy over the next two-quarters, before recovering in Q1 of 2017-18. At the same time, the move is expected to improve systemic liquidity in the banking system," it said.

Deutsche Bank economists expect the Reserve Bank of India to cut the policy rate by 25 bps in the upcoming policy review in December with a rising likelihood of a 50 bps reduction as well.