India ETFs May Be Pricing In Another Rate Cut

ETF Trends

Exchange traded funds tracking India, Asia’s third-largest economy, are having a rough go of things this year. For example, the WisdomTree India Earnings ETF (EPI) , the largest India ETF by assets, is down 5.3% compared to a decline of 4.2% for the iShares MSCI Emerging Markets Index Fund (EEM) .

Over no relevant time frame this year, one month, 90 days or even the past week, is EPI in the green. However, EPI and rival funds such as the iShares India 50 ETF (INDY) perked up a bit on Tuesday on speculation India will solidify its membership in the 2013 interest rate reduction club. [Rate Cuts Note Helping These ETFs Yet]

On Monday, yields on Indian 10-year sovereign bonds fell to their lowest levels since 2009 due to speculation the Reserve Bank of India will lower interest rates again when it meets on June 17. The one-year interest-rate swap, a derivative contract used to guard against fluctuations in funding costs, was little changed at 7.09, reported V. Ramakrishnan for Bloomberg.

Inflation, previously a four-letter word in India, has ebbed, allowing room for RBI to lower rates three times already this year. India’s benchmark interest rate currently resides at 7.25% and the combination of cooling inflation and slowing growth has some traders thinking RBI could take rates down to 6.5% to 6.75% before the end of the year.

Struggling India ETFs could use the help. After starting 2013 in fine form, helped by corporate earnings and recent government reforms, India ETFs have struggled due to fiscal deficits and fears the country could lose its investment grade credit rating. [Struggling India ETFs Lead Emerging Markets In Early 2013]

Indian small-caps have been even worse performers as the Market Vectors India Small-Cap ETF (SCIF) has plunged 22% year-to-date. Indian stocks have a reputation for volatility and the struggles of SCIF indicate investors have had little interest in embracing India’s smaller stocks as the country tries to use monetary policy to prop up its economy. [India ETFs Rise On Interest Rate Cut]

While ETFs such as EPI, INDY and SCIF have previously shown some positive reactions to India rate cuts, those funds may be in need of more substantive catalysts. For investors, the issue is those catalysts may not be imminent beyond the rate cut.

“A stable government would automatically lead some, if not all, of the following investment recovery drivers to transpire: A boost in domestic corporate sentiment towards carrying out more capital expenditure with the decline in political and policy risks. A boost through lower cost of capital in financial markets. More pro-growth, pro-employment, long-term policies by the government who recognises that it would be answerable for all the performances of future years,” Ben Levisohn reported for Barron’s, citing a Jefferies research note on India.

Problem is India does not hold elections until next year and “Indian equities will have little sustainable to cheer until the elections,” said Jefferies. Rate cut or not, near-term caution is warranted with India ETFs.

Market Vectors India Small-Cap ETF

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ETF Trends editorial team contributed to this piece.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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