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India ETFs in Focus as Central Bank Holds Interest Rates

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India’s central bank kept its benchmark interest rate steady at its recent monetary policy meeting, owing to inflation woes and concerns around fiscal deficit. The Reserve Bank of India (RBI) also increased its inflation forecast for the Jan-March quarter.

Into the Headlines

RBI kept the repo rate intact at 6%, the rate at which the central bank lends short-term money to commercial banks. Moreover, it also left the reverse repo rate intact at 5.75%, the rate at which it borrows from banks.

In the latest union budget, finance minister Arun Jaitley announced that the fiscal deficit target for 2017-18 was being revised upward to 3.5% of GDP. Moreover, rising fuel prices have also contributed to inflation woes in the country (read: India ETFs in Focus on Union Budget Release).  

"Fiscal slippage as indicated in the Union Budget could impinge on the inflation outlook. Apart from the direct impact on inflation, fiscal slippage has broader macro-financial implications, notably on economy-wide costs of borrowing which have already started to rise. This may feed into inflation,” per a Firstpost article citing a statement by the Monetary Policy Committee (MPC).

As a result, the central bank raised its inflation forecast to 5.1% for the fourth quarter of fiscal 2017. Moreover, it expects inflation to shoot up to the range of 5.1%-5.6% in the first half of fiscal 2018, before dropping to 4.5-4.6% in the second half. However, a rate hike is not expected in the near future, as Indian policymakers will not want to deprive the country of economic growth when it is in desperate need to create jobs.

In the last budget of Modi’s current term, Jaitley announced that the government plans to spend $218.1 billion (INR 14,000 billion) on rural infrastructure, in turn creating jobs for the rural population.

Economic Scenario

Coming to the economic data points, India’s GDP grew 6.3% year over year in the third quarter of 2017 compared with a three-year low of 5.7% in the previous quarter. The central bank revised its GDP estimates for fiscal 2017-18 as well as 2018-19. RBI expects the Indian economy to grow 6.6% in 2017-18 and 7.2% in 2018-19, in terms of Gross Value Added – GVA.

Moving to the manufacturing scenario, the Nikkei India Manufacturing Purchasing Managers' Index (PMI) decreased to 52.4 in January compared with a five-year high at 54.7 in December 2017. A reading above 50 indicates expansion.

"Following December's stellar performance, growth in the Indian manufacturing economy lost some impetus, reflected by slower growth in output, new orders and employment. Nevertheless, these key PMI indicators registered in expansion territory signaling the sector stayed on its track to recovery," per Aashna Dodhia, economist at IHS Markit, which compiles the survey.

Let us now discuss a few ETFs focused on providing exposure to the emerging market nation (see all Asia-Pacific Emerging ETFs here).

iShares MSCI India ETF INDA    

This fund provides exposure to large and mid-sized Indian equities.

It has AUM of $5.5 billion and charges a fee of 68 basis points a year. Financials, Computer-Software and Consumer Discretionary are the top three sectors of the fund, with 23.2%, 14.0% and 12.4% allocation, respectively (as of Feb 6, 2018). Housing Development Finance Co, Reliance Industries Ltd and Infosys Ltd are the top three holdings of the fund, with 9.1%, 7.8% and 6.5% allocation, respectively (as of Feb 6, 2018). The fund has returned 22.1% in a year. INDA has a Zacks ETF Rank #1 (Strong Buy), with a Medium risk outlook.

WisdomTree India Earnings Fund EPI

This fund provides exposure to Indian equities in multiple capitalization segments.

It has AUM of $1.7 billion and charges a fee of 84 basis points a year. Financials, Energy and Information Technology are the top three sectors of the fund, with 23.2%, 18.9% and 18.0% allocation, respectively (as of Feb 7, 2018). Reliance Industries Ltd, Infosys Ltd and Housing Development Finance Co are the top three holdings of the fund, with 8.8%, 7.9% and 6.1% allocation, respectively (as of Feb 7, 2018). The fund has returned 24.6% in a year. EPI has a Zacks ETF Rank #1, with a Medium risk outlook.

iShares India 50 ETF INDY

This fund provides exposure to large-cap Indian equities.

It has AUM of $1.2 billion and charges a fee of 93 basis points a year. Banks, Computer-Software and Refineries/Marketing are the top three sectors of the fund, with 26.7%, 11.3% and 10.2% allocation, respectively (as of Feb 6, 2018). Reliance Industries Ltd, Housing Development Finance Co and ITC Ltd are the top three holdings of the fund, with 7.6%, 7.0% and 5.8% allocation, respectively (as of Feb 6, 2018). The fund has returned 22.8% in a year. INDY has a Zacks ETF Rank #1, with a Medium risk outlook.

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ISHARS-SP INDIA (INDY): ETF Research Reports
 
ISHARS-M INDIA (INDA): ETF Research Reports
 
WISDMTR-IN EARN (EPI): ETF Research Reports
 
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