"We are cutting Sensex Dec-13 target to 21,000, which implies a PE of 15.5x on FY14e EPS and an upside of 8 percent from current level.

"Following the 5 percent depreciation of the Indian rupee in June and given continuing fears of abating global liquidity, currency stability has emerged as the overriding catalyst for the Indian equity market and until the currency stabilises, we expect the Indian equity market to stay highly volatile," the bank said in its India Equity Strategy report.

In May, Deutsche Bank has set 22,500 points target for Sensex by December 2013.

The report said the simultaneous interplay of a faster than anticipated Quantitative Easing (QE)-tapering, India's high short-term external financing needs and fears over China slowdown will set the tone for Indian equity markets over 2H2013, with the currency emerging as a key determinant.

"Our expectations of a reversal in the insurmountable trinity of sticky inflation, elevated interest rates and adverse current account deficit have been delayed by the generic risk off sentiment enveloping emerging markets.

"Despite India standing out on a relative basis on momentum in several economic criteria to its emerging market peers, its large current account deficit coupled with high short term external debt obligations will amplify its risks in the current environment of abating global liquidity, which should result in investors seeking a higher equity risk premium," it said.

PTI