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India ETFs Rally after Central Bank Holds Rates

Zacks Equity Research
These inverse ETF areas have performed better in the last one month.

The Reserve Bank of India (RBI) kept the interest rate unchanged at 6% in its October monetary policy meeting. This decision was widely expected by the markets and led to a rally in stocks in the subcontinent (read: What lies Ahead for India ETFs?).


However, the key banking authority slashed the Statutory Liquidity Ratio (SLR) by 50 basis points in order to encourage banks to lend more.


Economic Fundamentals


India’s GDP grew 5.7% annually in the April-June quarter of 2017, a three-year low. The primary reasons for this negative growth in GDP were prime minister Narendra Modi’s demonetization move in November, which led to slowdown in business activity, and the introduction of a major tax reform in the form of Goods and Service Tax (GST). GST weighed on manufacturing activity, as manufacturers were running down inventories on the eve of GST.


Moreover, the RBI cut its economic growth forecast for fiscal 2018 to 6.7% from 7.3%. In a separate development, Fitch ratings lowered India’s GDP growth forecast to 6.9% from 7.4% after the Indian economy reported weak performance in the April-June quarter (read: Fitch Lowers India's Growth Forecast: ETFs in Focus).


However, the emerging market nation is witnessing rising inflation. Consumer prices in India increased 3.36% year over year in August compared with 2.36% in July. Moreover, the RBI increased its inflation forecast for the second half of fiscal 2018 to 4.2-4.6%.


Although dismal economic growth might create pressure on RBI to ease rates, increasing price burden might act as an opposing force.


What Lies Ahead?


Fitch expects the impact of demonetization and GST to fade away in the coming months. Hence, this might lead to acceleration in economic activity. Moreover, the festive season in India is expected to spur spending and might lead to an increase in growth in the coming months.


However, the current slowdown in economic growth has led to huge outflows of foreign funds from Indian stocks.


Moreover, with agriculture contributing to 15% of the country’s GDP, growth concerns are also impacting a major chunk of the population who are dependent on agriculture for their livelihood. Adding to the agony, current state-sponsored farm loan waivers might add to inflation concerns.


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 $5.1 billion and charges a fee of 71 basis points a year. Financials, Computer-Software and Consumer Discretionary are the top three sectors of the fund, with 23.4%, 13.0% and 12.4% allocation, respectively (as of Oct 3, 2017). Housing Development Finance Co, Reliance Industries Ltd and Infosys Ltd are the top three holdings of the fund, with 9.6%, 7.5% and 6.0% allocation, respectively (as of Oct 3, 2017). The fund has returned 12.0% in a year and 24.4% year to date (as of Oct 4, 2017). INDA currently has a Zacks ETF Rank #2 (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 24.1%, 19.1% and 16.0% allocation, respectively (as of Oct 4, 2017). Reliance Industries Ltd, Infosys Ltd and Housing Development Finance Co are the top three holdings of the fund, with 8.5%, 6.9% and 6.4% allocation, respectively (as of Oct 4, 2017). The fund has returned 16.0% in a year and 26.2% year to date (as of Oct 4, 2017). EPI currently has a Zacks ETF Rank #2 with a Medium risk outlook.


iShares India 50 ETF INDY


This fund provides exposure to large-cap Indian equities.


It has AUM of $1.1 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 26.6%, 10.2% and 9.1% allocation, respectively (as of Oct 3, 2017). Housing Development Finance Co, Reliance Industries Ltd and ITC Ltd are the top three holdings of the fund, with 7.4%, 7.0% and 5.9% allocation, respectively (as of Oct 3, 2017). The fund has returned 14.6% in a year and 25.8% year to date (as of Oct 4, 2017). INDY currently has a Zacks ETF Rank #2 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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