Mumbai: On a day Indian stocks surged nearly 1% to close at a new record, Bank of America Merrill Lynch (BoFA-ML) reiterated its previous target of the Sensex falling to 32,000 points by the end of 2018, a decline of 11.5%.

On Tuesday, the Sensex and National Stock Exchange’s (NSE) Nifty closed at 36,139.98 points and 11,083.70 points respectively.

“We see little possibility that Budget 2018 delivers reasons for material upside to an already inflated equity market in India," analysts Sanjay Mookim and Nafeesa Gupta said in a note.

With markets seemingly on a vertical climb, there have been several voices of caution. On Monday, Ambit Capital Pvt. Ltd said the current Indian bull market is all set for a final frenzy. Earlier, banker Uday Kotak said investors must exercise caution as abundant liquidity is driving up a limited supply of stocks.

According to Ambit analyst Aditi Singh, it has been a year since the market took off post the “pause’ in end-2016, and history shows bull markets rarely last more than two years after a pause, and this could be the last stage of the bull market.

Singh said the “champion" sector in a rally—financials in the current scenario—tends to rocket in the final stages of a bull market. She also said the trailing P/E (price to earnings) of the market as a whole rises sharply in the final phase, which has been the case in recent times.

Over the last 12 months, the trailing P/E of Sensex has risen from 17 times to 24 times, Ambit pointed.

BoFA-ML also believes equity long-term capital gains (LTCG) tax may be announced in the Union budget on 1 February, and argued the rapid rise in equity markets seems to have added momentum to arguments in favour of such a tax. “In contrast, capital gains on other asset classes—debt / real estate—are taxed. One of the key arguments in favour of taxing equities is to establish some sort of equality amongst asset classes," Mookim and Gupta said.

LTCG tax on equities was abolished in 2004. BoFA-ML pointed that India is among the few countries globally that do not tax long-term equity capital gains.

“…if the government were to reinstate some form of long term capital gains on equities (we think likely), then that could be negative for returns/market sentiment," they added.

Mookim and Gupta pointed that forecasting revenue from LTCG is difficult, and the government is unlikely to do away with the Securities Transaction Tax or the Dividend Distribution Tax.

“A new LT gains tax on equities would not only hurt market sentiment, but can also hurt domestic equity inflows (which started when the LT definition for debt was increased from 1 year to 3 years)," they added.

They believe the government can allocate increasing amounts to existing rural programmes for housing, MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), cooking fuel and Swachh Bharat, or create a new scheme to transfer money to a large swath of voters.

“Farm loan waivers are underway in many major states. There may not be much left for the central government to ‘waive’ again in these places," they said.