The Indian stock market and the currency are currently going
through a roller coaster ride, thanks to the internal and
external crisis plaguing the economy. The Indian rupee had
plunged 29% since the start of the year to a fresh record low of
68.85 against the U.S. dollar on August 28 on concerns of a
possible U.S.-led military strike against Syria.
However, the currency has shown some strength after the new RBI
governor, Raghuram Rajan, took over office on September 4. The
stock index CNX Nifty recovered around 8% from the low of August
India ETFs Rebound on Central Bank Steps
Though the recent rally in the market points to optimism, there
has been a series of events and data that are weighing on the
Indian markets at least for the short term.
Weak GDP & Other Factors
India, which competed with China with its near double-digit
growth rates a few years back, has lost its shine in recent
quarters due to falling investment growth. India's economic
growth dwindled to a decade low of 4.4% for the first quarter
(April-June) of FY 2013-14, against 4.8% and 4.7% economic growth
in the last two quarters, respectively.
Slowdown in industrial and services sectors is believed to be the
major dampeners to GDP growth. Moreover, the HSBC Manufacturing
PMI, which determines the business activity in Indian factories,
fell to 48.5 in August from 50.1 in July, reflecting the lowest
figure since 2009.
Current Account Deficit
India's current account deficit has ballooned to a massive $90
billion from just $8 billion in 2007. The rising dollar is
further posing a risk as the import bill of oil and gold - the
country's two biggest imports - might further widen the current
Increased chances of Fed QE3 tapering on the back of improving
U.S. economy led to huge capital outflows from emerging markets.
India is no exception and investors have pulled out around $4
billion from Indian equity markets during the period - May to
3 Emerging Market ETFs Surviving the Slump
Inflation & Interest Rates
India's inflation rate is stubbornly high, above 10%, for more
than one year now. As of July 2013, India's consumer price index
stood at 10.85%, down 21 bps sequentially, but still much above
the RBI comfort zone. Moreover, supply constraints and heavy
dependence on fuel imports have kept inflation sticky.
Additionally, a continued fall in rupee will further aggravate
inflation forcing RBI to hike interest rates and thereby further
hampering domestic growth.
General Election and Other Factors
With the general elections in India due next year, we are
concerned that the recent populist measures taken by the
government of India, like the food security bill, might further
widen the fiscal deficit, leading to a further fall in rupee.
Moreover, rampant corruption and crumbling infrastructure are
also crippling the economy's growth prospects.
The Repercussion Effect
These worsening economic and political situations have prompted
some of the leading rating and research companies to lower their
GDP forecast for India. On September 3, rating agency S&P
hinted at downgrading India's credit rating from the current
"BBB-minus". A downgrade will push the Indian economy to "Junk"
status likely precipitating a further panic in the Indian markets
India ETFs--Behind the Mayhem
Experts suggest that the massive inflows which the emerging
markets witnessed during the period following quantitative easing
might pause for a while. In fact, the Indian story has now been
taken over by the global story.
The Optimists and Key Positive Takeaways
However, some market experts are still bullish on the long-term
Indian growth story and believe that it can't be written off due
to short-term volatility and uncertainties. This is primarily
thanks to a slew of measures taken by Indian government and the
RBI governor lately to arrest the depreciating rupee and the
The country will likely boost its oil imports from Iran, which
has agreed to accept payments in Indian rupees. This will likely
avoid depletion of India's foreign exchange reserves.
Additionally, the government has cleared 17 FDI (foreign direct
investment) proposals worth Rs 993 crores to boost inflows into
Moreover, to curb India's consumption of gold and help narrow the
widening current account deficit, the government has hiked import
tariff four times in a year's span, while reducing the same only
Two India ETFs Leading Emerging Markets
Furthermore, Rajan has proposed a number of measures to rescue
the crippled economy including more trade settlement in rupees.
The governor has also hinted at changing the current stance of
inflation control to that of boosting growth and liberalizing the
financial market by enhancing the limits for exporters.
Indian ETFs in Focus
Given wide trade deficits and a sharp fall in rupee, Indian ETFs
have been struggling this year, plunging double digits over the
timeframe (see more in the
For those seeking to tap this opportunity of beaten down prices
could find the following ETFs as great choices if the Indian
economy improves, the currency starts stabilizing, and inflation
drops to a manageable level.
EGShares India Small Cap Fund
This fund tracks the India Small Cap Index, and is relatively
unpopular with a small asset base of $14.9 million, while it has
an expense ratio of 0.85%. With a holding of 76 securities, the
product is widely diversified across each sector and security.
The fund lost over 41% since the beginning of the year but jumped
around 5% on the day Rajan joined as a governor (read:
Rupee Slide Hits Small Cap India ETF
). SCIN has a Zacks ETF Rank of #2 or 'Buy' rating, suggesting
that it is expected to outperform its rivals over the one-year
iShares India 50 ETF
This ETF tracks the S&P CNX Nifty Index and has amassed
$347.6 million in its asset base, which is spread across 51
Indian securities. The fund invests nearly 59% of its total
assets in the top 10 holdings and is pretty expensive, charging
investors 93 basis points a year in fees. INDY has lost around
23% year to date but was up 5.5% on Sep 4 and has a Zacks ETF
Rank of 3 or 'Hold'.
PowerShares India Portfolio
This fund follows the Indus India Index, holding 50 stocks in the
basket. The ETF has managed assets of $281.6 million so far, and
has an expense ratio of 0.81%. PIN lost over 19% in the
year-to-date timeframe but added nearly 7% on the day of
Raghuram's joining and currently has a Zacks ETF Rank of 3 or
The Bottom Line
Despite several constraints, growth in India is still among the
highest in the world. The Indian economy seems poised for growth
in the second half of the year as the government and the RBI
governor engage in several reform measures to revitalize the
all the Emerging Asia Pacific ETFs here
Further, positive factors like a rising middle class and a
younger population with growing spending power would result in
soaring domestic consumption and in turn fuel economic growth,
suggesting that the India ETF outlook - at least over the long
term -isn't as poor as you might think.
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ISHARS-SP INDIA (INDY): ETF Research Reports
PWRSH-INDIA POR (PIN): ETF Research Reports
EMERG-GS INDIA (SCIN): ETF Research Reports
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