The Reserve Bank is likely to go for a 50-basis point rate cut this calender year as the Budget 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 has given more preference to stability rather than growth and this should give more room to cut key policy rates.
"We now expect 50 bps of policy rate cut in calendar year 2016 (from 25 bps) as the Budget should give RBI sufficient space," UBS said in a research note.
Rather than opting for any growth-boosting stimulus, the Budget has stuck to the fiscal deficit of 3.5 per cent of 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 per cent in 2016-17 as against 7.6 per cent in 2015-16). "We now forecast Nifty earnings growth of 10 per cent in 2016-17," it said.
According to UBS, markets appear reasonably valued and some re-rating is expected, supported by likely 50 bps of rate cuts in calender 2016, which implies 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 is unlikely to alter the market trajectory and the global risk environment should drive markets near-term.
A day after suffering losses following the presentation of the Union Budget, the benchmark Sensex bounced back and was trading with gains of 620 points today at 23,622.11 in afternoon trade, bolstered by renewed hopes of a rate cut by the Reserve Bank amid positive Asian cues.