UBS has projected a year-end target of 7,500 for Nifty, with the investment bank expecting the Reserve Bank of India (RBI) to cut interest rates during 2016. The downside for Nifty has been set at 6,550.
“We expect 50 basis points of policy rate cuts in 2016 (from 25bp) as the Budget should give the RBI sufficient space,” UBS has said in a report released after the presentation of the Union Budget 2016-17 by Finance Minister Arun Jaitley.
UBS expects Nifty earnings growth of 10% in FY17 (on a base of 2% growth in FY16). “We sense recalibration of market expectations on growth, finally, though consensus earnings cuts may yet be sharp (further 8% in 2016),” UBS India Head of Research Gautam Chhaochharia has said in the report.
UBS has said that 7th Pay Commission appears to have only partially been provisioned for in the Union Budget. The Budget cut fiscal deficit to 3.5% of GDP, sticking to its fiscal consolidation roadmap rather than any growth-boosting stimulus. “However the consolidation is of poor quality, in our view. More than half the consolidation is due to divestment or telecom spectrum sales – this does not increase the pool of savings for private sector, inhibiting growth,” UBS has said.
Capital expenditure is budgeted to decline as a share of GDP. The Central Govt’s stance suggests that states may also be forced to stick to their fiscal limits, which implies deterioration in their quality of spending too, given CPC linked increases in pay is a bigger issue for them.
Instead of the capital expenditure focus in 2015-16, the 2016-17 Budget Budget has aimed to prioritise rural sector. “We estimate rural spending rise of 11% yoy, about the same pace as projected nominal GDP growth in FY17,” the report said.
Initiatives focused on ease of doing business and longer term productivity for rural India (crop insurance, irrigation, national market) are structural in nature. These promise more support for long-term growth than simply increased expenditure or reduced taxes, the impulse from which would likely be temporary.
From urban consumption perspective the Budget was broadly disappointing vs street expectations – given limited CPC implementation and higher/additional taxes on specific goods (high-ticket cars, apparel, jewellery). Govt reiterated its commitment to a stable tax regime, announced measures for tax simplification, improving compliance.