If you expect the Sensex to rally as much as 27 per cent like last year, just forget it. In fact, most analysts have now begun reducing their targets on the Sensex, as many realize that the Narendra Modi government may not have a magic wand to immediately push growth into the double digits.
Earnings are not keeping pace with expectations
Earnings have just not been able to match expectations. This quarter is expected to be awful, while the next few quarters are not expected to be extraordinary in anyway. IT stocks, which have a heavy weightage in the Sensex and the Nifty are expected to show muted growth. With the Sensex trailing price to earnings ratio at 17 times, the markets are fully priced. To expect a solid return in an already expensive market is ruled out.
MAT on FIIs - A problem in the short term
A minimum alternative tax on FIIs is allowed without retrospective effect. What this means is that FIIs have to pay MAT on the earlier years. There are reports that this could cost FIIs Rs 40,000 crores. This is a substantial sum and immediately after the issue was raked up we have been seeing muted purchases from FIIs in the cash markets. In fact, on Friday they net sold in the cash market to the tune of Rs 675 crores. A short to medium term impact on the stock market is likely.
RBI Unlikely To Cut Interest Rates Aggressively
The Reserve Bank of India (RBI) is unlikely to cut interest rates aggressively going forward. Unseasonal rainfall may continue to push inflation higher, which could weigh on the RBI's mind. Any escalation in the prices of oil, could also push prices higher.
An impending rate hike by the US Federal Reserve
There is likely to be impending rate hike by the US Federal Reserve sometime later this year. There is no indication whether this would come in the month of June or Sept, but it could happen anytime this year. One could see some withdrawal from FIIs if that happens, which could put pressure on the markets.