This year has not been great for emerging markets in general
but Indian markets have been among the worst sufferers. Indian
stocks as well as the currency have been hit by a plethora of
factors-some external and many internal-resulting in mass exodus
of foreign investors.
Friday was one of the worst days ever for the Indian stock
market as stocks plunged about 4%, their biggest loss since 2011.
The stock market suffered a further decline of 1.6% on
The Rupee tumbled by 148 paise on Monday, its single largest
drop in a decade to touch an all-time low of 63.23 to a dollar.
Overall the currency is down more than 16% against the US dollar
Is the Worst Ahead for the Egypt ETF
As a result, many India
have registered double digit decline in the past three months.
Small-cap ETFs like Market Vectors India Small Cap ETF (
) and EGShares India Small Cap ETF (
) have been hurt the most-with more than 30% plunge, while other
popular India ETFs like iShares India 50 ETF (
) iPath MSCI India Index ETN (
) have dropped by more than 20%.
Did Reserve Bank Measures Backfire?
Last week, the central bank announced a series of measures to
limit the capital flight and protect the currency. (See:
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The steps included limiting the investment Indian companies
can make overseas without seeking regulatory approval to 100% of
their net worth, from up to four times their net worth
The bank also reduced the amount that an Indian resident can
send abroad to $75,000 per year from $200,000 earlier. Further,
they said that the remittances cannot be used for buying property
Indonesia ETFs in Crash Territory on Currency
Earlier in July, the central bank had increased the interest
rate on its short-term liquidity window and capped its daily
liquidity window, thereby raising short-term borrowing costs and
restricting funds available to banks. Additionally they announced
a sale of Rs 120 billion in bonds, effectively draining liquidity
from the market.
The measures announced by the central bank last week have
obviously backfired as foreign investors feared that the country
may impose more capital controls in future.
Macroeconomic Fundamentals Worsening
The Indian economy grew at just 5% during 2012-13 fiscal year,
lowest in a decade and ~8% average growth rate achieved during
2006-11 now appears to be a thing of the past. The IMF expects
the economy to grow at 5.7% in 2013. Many other agencies expect
the growth rate to be much lower. Consumer inflation in the
country is now near 10%.
Is there Any Silver Lining?
Among the positive developments, exports have been rising
recently as a result of weak rupee and gradual recovery in global
economy. India's IT sector in particular stands to benefit from
these two factors.
Further, taxes on gold imports have been able to bring down
gold imports, which are a significant factor in current account
deficit, which widened to 4.8% of GDP in the fiscal year ended
March. Still the government plans to bring down the deficit
to 3.7% of GDP by imposing curbs on imports of gold, silver and
non-essential items, seems rather far-fetched.
Earlier this month, Indian markets had cheered the appointment
of renowned economist Dr. Raghuram Rajan as the next governor of
the central bank. His term starts at a very challenging time and
it remains to be seen whether he will be able to provide a new
direction to the monetaryy policy that can put the economy on the
The Bottom Line
Rising interest rates, strengthening US dollar and gradually
recovering US economy is leading to a general reversal of capital
from the emerging economies. As a result, many of these ETFs have
been hit this year-particularly after 'tapering' concerns emerged
in May. Countries like India that are dependent on external
capital to finance their growing current account deficit seem to
be the worst sufferers now.
India suffers from some structural problems like slowing
growth, high inflation (consumer inflation touching 10%) and
widening fiscal and current-account deficits. Massive corruption
and crumbling infrastructure further impede growth.
Unless the government shows political resolve to address the
structural problems affecting the economy, the outlook for India
ETFs remains rather cloudy as of now. Any 'band-aid' measures may
just bring some temporary reprieve. But with general elections
due next year, the chance for some major reforms is rather slim
While some market participants have argued that the economic
malaise affecting India has been known for a long time and
nothing has fundamentally changed in the last couple of weeks and
thus there may be long-term value emerging in the Indian
market; we think that in view of the negative sentiment
prevailing currently, investors should avoid Indian ETFs for the
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ISHARS-SP INDIA (INDY): ETF Research Reports
IPATH-MS INDIA (INP): ETF Research Reports
MKT VEC-INDI SC (SCIF): ETF Research Reports
EMERG-GS INDIA (SCIN): ETF Research Reports
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