The BSE Sensex should rise almost 17 percent by the end of next year as investors bet on a possible cooling-off in inflation and a reversal in the interest rate tightening cycle in Asia's third-largest economy, a Reuters poll showed.

BSE

BSE Sensex

The main 30-share BSE index will likely rise to 19,250 points by end-2012 from Thursday's close of 16,483.45 points, according to the median forecast from a Reuters poll of 20 market participants.

The index should rise over 9 percent by mid-2012 to 18,000 points, the poll conducted over the past week showed; lower than the 19,500 level seen in a September poll.

The benchmark is down about 20 percent this year and is among the world's worst-performers, as a string of interest rate hikes designed to reduce high inflation have started to eat into company profits, while slowing local growth and the European debt crisis have forced foreign funds to cut inflows.

A fall in the Sensex this year would be only the second annual decline in a decade. Data on Wednesday showed India's economy grew at its weakest pace in more than two years in the September quarter.

A slide in the local currency has also added to worries as it raises the cost of imports and also increases the debt-servicing cost on foreign loans. The rupee has slumped more than 14 percent against the dollar this year, with most of the losses coming in the last three months.

It appears that probably the worst is over, said R.K. Gupta, Managing Director of Taurus Mutual Fund in New Delhi, who expects the benchmark index to reach 19,000 points by mid-2012 and 20,000 by the end of next year. We believe that the interest rates have already peaked and you could see a reversal from March onwards and the rupee should see some improvement from January onwards, he added.

A domestic consumption-led growth story in the world's second-most populous nation has lured foreign investors over the past years to pour money into local equities. This year, foreign funds have been net sellers of about $492 million of Indian shares, compared with a record net buy of $29 billion in 2010.

Once the European crisis is settled, and with the U.S. showing signs of improvement, we think India provides a very good platform for foreign investors and there should be a bounce back in inflows, Gupta said.

Driven by high food and global commodity prices, India's headline inflation in October hovered above 9 percent for the 11th month, despite a 20-month rate tightening cycle that has seen the central bank increase interest rates 13 times since March 2010.

The Reserve Bank of India (RBI) has lowered the country's growth forecast to 7.6 percent for the current fiscal year ending in March from 8 percent. Also, the government has been hit by a spate of corruption scandals, paralysing policy-making. The government recently announced long-pending retail market reforms that include opening the country's supermarket sector to foreigners but investors still remain wary with the move drawing howls of protest from opposition parties and allies within the Congress Party-led coalition.

The inflation rate should fall sharply over the next few months and the country's economy should hold up despite the global economic slowdown, Prime Minister Manmohan Singh said on Tuesday, with all eyes on him to see how the government deals with further economic liberalizations and planned asset sales.

Inflation will cool off ... and the likelihood of further rate increases is fading with the slowing growth numbers, said K.K. Mital, Head of Portfolio Management Services at Globe Capital. The sentiment is very, very negative as far as (government) decision-making is concerned, he said, adding, It is important to give some positive signals to foreign investors.