Deutsche Bank sees Sensex at 22,500 by Dec,further rate cuts

Deutsche Bank sees Sensex at 22,500 by Dec,further rate cuts

With inflation expected to decline sharply,real interest rates should become further embedded in positive territory: report

Deutsche Bank today reaffirmed its target for the BSE Sensex at 22,500 by December and said it expects further 75 basis points cut in repo rate this year,taking its CY2013 rate cut forecast to 1.50 per cent.

The 30-share Sensex ended at 19,673.64 points today.

“We reiterate that monetary accommodation will remain a core catalyst for Indian equity markets and reiterate our December 13 Sensex target of 22,500,given the scope for continued monetary easing,” the German lender said in its ‘India Equity Strategy’ report here.

On May 3,while unveiling its annual monetary policy,the RBI cut the repo rate (the interest rate at which it lends to banks) by 0.25 per cent to 7.25 per cent and sounded hawkish and cautious on upside risks to inflation in the near term.

However,Deutsche Bank’s India economist Kaushik Das believes weakening growth and a bearish trend in commodity prices are likely to more than offset upside risks to inflation and RBI may be compelled towards further easing.


Das sees inflation heading to 5 per cent under the baseline scenario but below 4 per cent under an alternative scenario and expects three additional 0.25 per cent rate cuts hereon,taking down the repo rate to 6.5 per cent in CY13.

Recent easing in international oil and gold prices,a falling inflation trajectory and the Government’s earnest efforts to address fiscal concerns should provide multi- layered support to India’s macro environment,said Taimur Baig,another India economist at Deutsche Bank.

The foreign lender said the recent developments suggest that WPI inflation could be poised for a further decline,driven by easing global oil prices. The expectation of a normal monsoon and a strong rabi crop output should catalyse a further decline in food inflation.

With inflation expected to decline sharply,real interest rates (on WPI) should become further embedded in positive territory,the report said.

This should support the long-awaited channelisation of India’s household savings into financial assets and accelerate deposit accretion for Indian banks,it said.

The Bank’s analyst Manish Karwa believes further rate cuts should assuage concerns over asset quality and drive treasury gains on bond portfolios as Indian lenders have major exposure to Government bonds (25-30 per cent of balancesheet).