The 30-scrip BSE Sensex is expected to fall to the 9,000 level by mid-2009, according to Indian Market Strategy, a report by Credit Suisse released on Friday. The report expects the recent market turmoil to affect the consumer and investor sentiment well into 2009. Even if interest rates fall and the rupee stabilises, the much-needed domestic and foreign investor inflow could shrink for many quarters to come, cited the report.

The Credit Suisse report expects the earnings of Sensex companies for FY10 to be at the same level as in FY09 and FY08 on the back of reduced capital expenditure. This is likely to lead to a lower return on equity from the current 23 per cent to just above the historical average of 15 per cent by FY10.

From a low of the FY10 base, earnings could rebound sharply by FY11 and this may spur the market to stabilise by the end of 2009. However, amid political uncertainties in the election season, fiscal pressure and a slowdown in corporate spending, mid-2009 could cause the market to reach fair-value levels.

The Indian market is still trading at trailing price-to-book value of roughly 2.8 times, substantially above the historic low of around 1.8 times. Credit Suisse's report is pessimistic as it expects Corporate India to vibrate only briefly on account of the rising cost of capital in 2008 before rebounding to normalcy in 2009.

The report does have some unexpected positives. For one, the market fall has made policy-makers in India too to turn pro-growth far sooner than expected. Indian policy-makers have also started looking for ways to support businesses as evident from revisions in the guidelines for external commercial borrowings and participatory notes. Continuous promises by the central bank and the finance minister of sufficient liquidity are also noteworthy.

All these measures and their follow-ups should lead to market stability and a rebound in the coming weeks. The near-term rebound could be fairly sharp if efforts of global authorities cause a turnaround in the near-term investor risk appetite in global banking circles. The report expects 10-15 per cent rebound from the current low, rather than a continuous correction to sub-10,000 target in the near term.