Budget over, markets now look to RBI for rate cuts

Morgan Stanley expects the central bank to cut rates this week, 125 bps in cuts through 2015.  

After the Budget, which did not give any stimulus to companies, the markets are looking hopefully at the Reserve Bank of India for further rate cuts, to justify sky-high valuations that are not based on earnings growth.

The market is also rejoicing that the Budget has done nothing to upset the entrenched disinflationary trend.

Morgan Stanley expects the attention to shift to key policy reforms beyond the Budget. Budget 2015: Complete Coverage

It said, “We believe that the focus will now shift to approval of key policy legislation in Parliament — amendment to land acquisition Act, Goods and Services Tax Bill, coal mining Bill and Bill for an increased foreign direct investment limit in insurance — and potential monetary policy action.”

The brokerage maintains its view that the RBI will cut policy rates by 125 basis points by 2015-end, with the next move coming as early as this week.

Morgan Stanley’s bullishness almost seems audacious, given that its expectations from corporate India are dramatically higher than consensus estimates.

While the consensus view expects Sensex earnings to grow by 17 per cent over the next two years, Morgan Stanley is forecasting CAGR earnings growth of 24 per cent.

Credit Suisse believes that the FY16 growth will get a boost by higher government plan expenditure and state spending and is expected to be positive for private sector banks, NBFCs, construction and cement companies.

Also, earnings upgrades are likely for high tax paying companies in the consumer space like Hindustan Unilever, Nestle, United Spirits, Page Industries and Colgate as their tax liabilities will come down from FY17, even though this year they will pay higher tax. Budget 2015: Complete Coverage