Last week, the Fed surprised financial markets by not tapering
its asset purchase program. Indian stocks rallied on the surprise
move by the Fed. Also, the Indian rupee strengthened against the
U.S. dollar on better outlook for foreign inflows.
However, after soaring on the Fed's surprise move, came the Reserve
Bank of India's unexpected rate hike. Indian financial markets were
roiled when the Reserve Bank of India unexpectedly raised the key
policy rate by 25 basis points to 7.5%, triggering a big move
country's currency, shares and bond prices. The BSE Sensex slumped
382 points, or 1.85%, to end at 20,263, snapping its four-day
winning streak (
India ETFs--Is the Worst Over?
Slow growth of the economy, high inflation and weakened currency
were reasons cited for the RBI's surprise move. Growth slowed to a
decade low of 5% in the year ending March and was at 4.4% in the
April-June quarter. The inflation rate in India was recorded at
6.10% in August of 2013.
India is suffering from a host of economic problems. These include
poor infrastructure and stubborn inflation that keeps interest
rates high, dependence on imported fuel, a current account deficit
due to low exports and high imports, and fragile confidence that
has deterred business investment.
Additionally, the government's budget is in deficit thanks to
costly fuel subsidies and the fiscal position that is likely to
deteriorate because of the looming cost of a new law guaranteeing
food for the poor (
India ETFs Rebound on Central Bank Steps
India is also planning to start its quantitative easing program in
order to provide a boost to overall growth. In its endeavour to
provide quantitative easing, RBI will purchase commercial paper of
companies of certain sectors. Target sectors include small and
medium enterprises, engineering goods and commercial vehicles.
The stimulus program will assist in restoring the waning growth of
the economy without undermining the central bank's inflation focus.
Impact on ETFs
ETFs focusing on India tumbled after the RBI unexpectedly increased
interest rates with the motive to control inflation. One of
the ETFs with Zacks Rank of 3 'Hold',
WisdomTree India Earnings Fund (
, lost 2.8% in the last trading session. EPI is by far the largest
ETF in terms of asset base and also the most liquid fund tracking
Indian equities (
India ETFs--Behind the Mayhem
The fund offers a broader play in Indian equities as it holds a
portfolio of 188 securities and appears to be concentrated in the
top 10 stocks where it has invested 50.03% of its assets.
Among individual holdings, Reliance Industries, Infosys and Oil and
Natural Gas Corporation form the top line of the fund and together
account for almost 25.2% of the allocation. The fund charges an
expense ratio of 83 basis points on an annual basis.
iShares S&P India Nifty 50 ETF (
, closed down 3%. The product has amassed a net asset base of
$421.3 million. The fund's asset base is spread across 51 Indian
securities and does little to reduce company specific risk as more
than 58.8% of the asset base goes towards the top ten (
Zacks Top Ranked India ETF in Focus: INDY
ITC Limited (9.97%), Reliance Industries Limited (7.46%) and
Infosys Ltd (7.42%) are the three top elements in the basket.
Among sectors, banks are the first preference of the fund as they
make up a substantial portion of the basket with a share of 19.9%.
The ETF is extremely pricey with an expense ratio of 93 basis
points a year.
Yet another ETF that dwindled on the surprise rate move by RBI is
PowerShares India Portfolio (
The fall in PIN ETF price was comparatively more than the other two
ETFs discussed above. The fund closed the day falling 3.51%.
The fund has built an asset base of $359.1 million since its
inception and provides exposure to 51 Indian securities. These 49
securities are mainly from energy, information technology and
financial sectors in which the fund assigns more than 60% of the
asset base in total (
Does Your Portfolio Need An India ETF?
Among individual holdings, Reliance Industries (9.96%), Infosys
(9.64%), and Oil & Natural Gas Corp (7.95%) occupy the top line
of the fund. The fund appears to be a bit more reasonable than
INDY, charging a fee of 81 basis points from investors.
The Indian capital market is more dependent on foreign
institutional investment (FII) for its growth. Investors should
note that after Raghuram Rajan took over as the new Reserve Bank of
India governor, FIIs seem to have resumed buying Indian equities.
Until last week, FIIs had bought $1.7 billion worth of shares. This
should positively boost the Indian capital market.
Additionally, RBI measures to control inflation and quantitative
easing program should provide further support to the growth of the
economy. However, it is advisable that investors should wait for
further evidence before investing in the economy, though recent
trends are certainly encouraging, especially if the moves get the
problems under control.
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WISDMTR-IN EARN (EPI): ETF Research Reports
ISHARS-SP INDIA (INDY): ETF Research Reports
PWRSH-INDIA POR (PIN): ETF Research Reports
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