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Rate Cuts Could Boost This India ETF

ETF Professor

When it comes to interest rates, U.S. investors focus on the Federal Reserve, but the Fed is far from the only central bank that has recently trimmed borrowing costs. Plenty of emerging markets central banks, including the Reserve Bank of India, have been joining the rate cut fun.

What Happened

On the back of the intensifying trade rift between the U.S. and China, the MSCI Emerging Markets Index is lower by almost 7% this month, enough to keep investors away from developing economies and the related exchange traded funds for the time being.

However, historical data indicate Indian stocks often respond positively to rate cuts, potentially making the WisdomTree India Earnings Fund (NYSE: EPI) a rebound candidate.

Why It's Important

“The whole world is surrounded by trade frictions and geopolitical uncertainty,” said WisdomTree in a recent note. “India is not immune to these effects and its latest gross domestic product (GDP) reading at 5.8% year over year (YoY) was substantially below what it believes it can achieve. While the International Monetary Fund (IMF) is confident in a 7%+ growth rate for India in the long run, the RBI stepped in to support short-term growth.”

What's encouraging for investors is that the RBI has been proactive in supporting Asia's third-largest economy. The most recent rate cut, one of a surprising 35 basis points, was RBI's fourth since February. India's moderate inflation has paved the way for those rate cuts, allowing RBI to pare borrowing costs to the lowest levels in nearly a decade.

Rate cuts are often viewed as negative for the financial services sector, which accounts for over a quarter of EPI's sector weight, but the lower borrowing costs can matriculate to the more cyclical groups in the fund, including energy, technology and consumer cyclicals. Those sectors combine for over 43% of the fund's weight.

“As rate cuts by the RBI are passed on by banks to end customers as lower interest rates on personal, auto and home loans, this action is good news for sectors like Consumer Discretionary, Industrials, Manufacturing and Automobiles, and even Financials can benefit from increased economic activity,” according to WisdomTree.

What's Next

Past performance is never a guarantee of future returns, but as WisdomTree points, India's benchmark Sensex posted an average gain of 16.40% following the conclusion of RBI's three previous rate-cutting regimes since 2009.

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