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India ETFs Pop After Central Bank’s Surprise Rate Cut

This article was originally published on ETFTrends.com.

India stocks and country-specific exchange traded fund were among the few areas of strength Thursday after the central bank unexpectedly cut back its key policy rate and shifted to a more dovish stance.

Among the leading areas of the market on Thursday, the iShares MSCI India Small-Cap ETF (SMIN) rose 1.6%, VanEck Vectors India Small-Cap Index ETF (SCIF) gained 1.8% and WisdomTree India Earnings ETF (EPI) advanced 1.1%.

Mid- and small-cap Indian stocks led the charge on the rate cut decision as many observers argued that expectations were already baked into the market prices.

“Markets were already factoring (the rate cut), so not much of an excitement to be seen. But this is a good time for lowering rates as the focus is on increasing private investments,” Sushant Kumar, fund manager for equity at Raay Global Investments Pvt, said, according to Bloomberg.

India's markets have been strengthening since Shaktikanta Das was named the new governor of the central bank.

“Even as borrowing costs may go down a bit, concern on India’s fiscal deficit still remains an overhang on sentiment,” Viral Berawala, chief investment officer at Essel Finance Asset Management Ltd, told Bloomberg. “The positive seems to be for the short term.”

Bank Stocks Pop

Bank stocks were among those that were popping off on the rate cut decision, which helped support the financial sector heavy India ETFs. For example, SMIN includes a 24.5% tilt toward the financial sector and EPI includes a 23.0% position in financials.

“It is a positive step as this will help lower the borrowing cost. We expect banking and auto stocks to react positively to this development,” A. K. Prabhakar, head of research at IDBI Capital Market Services Ltd, said.

Looking ahead, the RBI's interest rate decision will make liquidity cheaper, especially for banks focused on higher loan growth and asset purchase from non-bank finance companies. Sameer Kalra, president at Target Investing, argued that the sectors to benefit will include state-run and private banks. The easing will help support consumption demand as well.

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