The Reserve Bank of India’s tightening moves have made Indian markets more vulnerable to global cues with share prices likely to fall, led by banking stocks, a Morgan Stanley report says.

According to the global brokerage firm, RBI’s dovish commentary last Monday amidst possibly the severest liquidity tightening that the central bank has initiated since 1998 has made the asset markets even more vulnerable to global cues especially on possible tapering of quantitative measures in the US.

“As RBI’s moves echo into the economy, we believe that share prices in India are likely to fall led by banks,” Morgan Stanley said.

The global brokerage firm had earlier projected that the Nifty would trade in the 5,600-6,300 range, but “last week’s policy guidance and dovish signals may take toll on the market led by financials”, it said.

“We now think the Nifty is likely to be in a lower trading range of 5,200-6,000. We cut our bear case target from 17,912 to 16,200,” Morgan Stanley said.

Morgan Stanley has revised the bear case on the Sensex down by another 10 per cent from 17,912 to 16,200 and has lifted the probability of that happening from 20 per cent to 35 per cent.

Meanwhile, its bull case probability of 23,000 has fallen to 5 per cent from 20 per cent earlier.

The research further said “our probability-weighted index target for end-2013 is cut to 19,720,” and added that “the fall could be more severe but the index has heavyweights, which are insensitive to rates and beneficiaries of a rising USD.”

The 30-share barometer, Sensex, which had lost over 517 points in the previous two sessions is trading almost flat with gains of just 49 points at 18,732.16 in morning trade on Thursday.

India ranks poorly on valuation, earnings revision breadth, political risk and corporate governance score, Morgan Stanley said.