RBI may cut policy rates by 50bps in upcoming monetary review: UBS

The Reserve Bank of India (RBI) is likely to go for a 50-basis points rate cut this calendar year as the Budget 2016 gives the central bank sufficient room to adopt a more accommodative stance, UBS said in a research note, adding that its Nifty target is 7,500.

According to the global financial services major, the Budget 2016 has given more preference to stability rather than growth and this should give more room to cut key policy rates.

"We now expect 50 basis points of policy rate cut in the calendar year 2016 (from 25 basis points) as the Budget 2016 should give RBI sufficient space," UBS said in a research note.

Rather than opting for any growth-boosting stimulus, the Budget 2016 has stuck to the fiscal deficit of 3.5% of gross domestic product (GDP) for 2016-17.

However, the consolidation is of "poor quality", UBS said in the note, adding that "more than half the consolidation is due to divestment or telecom spectrum sales this does not increase the pool of savings for the private sector, inhibiting growth".

The global brokerage firm said it expects no acceleration in real GDP growth (7.4% in 2016-17 as against 7.6% in 2015-16). "We now forecast Nifty earnings growth of 10% in 2016-17," it said.

According to UBS, the markets appear reasonably valued and some re-rating is expected, supported by likely 50 basis points of rate cuts in the calendar year 2016, which implies the lower cost of capital.

"Our revised end-2016 Nifty target is 7,500; our downside scenario implies a Nifty value of 6,500," it said, adding that the Budget 2016 is unlikely to alter the market trajectory and the global risk environment should drive markets in the near-term.

A day after suffering losses following the presentation of the Union Budget 2016-17, the benchmark BSE Sensex bounced back and was trading with gains of 620 points on Tuesday at 23,622.11 in the afternoon trade, bolstered by renewed hopes of a rate cut by the Reserve Bank of India (RBI) amid positive Asian cues.