Research reports by foreign investors analysing the FY16 Union Budget believe its effect on the equity markets will be positive. They are now looking to the central bank to lower interest rates and support growth.

Morgan Stanley believes the Budget was “a good balancing act,” choosing a slower path to growth than expected but working within fiscal constraints. The implications for the markets include that it earnings would remain positive while encouraging domestic savings into equities. “We continue to be bullish on Indian equities with our key overweight positions being private sector banks, industrials, discretionary consumption and technology.”

Steps to recover loans Macquarie Research found the Budget’s biggest disappointment to be no clear signal on the recapitalisation of PSU banks. “However, inclusion of NBFCs under Sarfaesi Act and the proposed Bankruptcy Code augurs well for the financial sector in the medium- to long-term, as it would help recover bad loans faster.”

Maybank Kim Eng maintains its ‘overweight’ call on the Indian equity markets. It expects the Nifty to rise to 9,540 (up seven per cent) by the year-end while Bank of America Merrill Lynch (BofA-ML) expects the Sensex to hit 33,000 over the same period.

BofA-ML also expects foreign inflows into India to rise now that FDI and FII caps have been made fungible. “One of the concerns in the market is that India is heavily over-owned by GEM (global emerging market) funds. This position will ease slightly as India’s MSCI weight would increase from 7.6 per cent to 8.4 per cent, following the decision to make the FII and FDI caps fungible.

Rate-cut hopes

All eyes have now moved to the RBI, with investors expecting a rate cut soon. Morgan Stanley believes “the Budget per se does not have any measures that would disturb the current entrenched disinflation trend” and expects the central bank to cut policy rates by 125 basis points by the end of 2015, with the next move coming as early as this week.

Macquarie and BofA-ML concur, both predicting a 25 basis points cut in key lending rates in April.

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