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Can India ETFs Rebound in 2014?

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The surprise “No Taper” decision by the Fed in its September policy brought in the much needed respite for many emerging nations. Indian markets have gained more than 6.5% in the last three months.
More recently, election euphoria in Asia’s third largest economy pushed its stock market index - Nifty- to an all time high of 6415 last week. The impressive performance in the recent elections in four states by the Bharatiya Janata Party--perceived to be more pro-business than the current ruling party Congress—resulted in the bullish trend.,.
A few other factors also supported the surge. The rupee, which touched a record low of around 69 per dollar during the month of August, has bounced back 10% during the past three months. Below we have listed some of the other drivers for this rally. (read: Buy These High Beta ETFs For a Santa Claus Rally)
Hot Money Inflow
Foreign Institutional Investors (FII) have again started to pour funds in the emerging economies in search of higher returns. Since the beginning of September, FIIs have bought a massive $5.5 billion of Indian equity after pulling out $3.61 billion from June to August.
This massive inflow of cheap money after Fed decided to keep its monthly bond-buying program intact enabled the emerging equity markets to revive, pushing them higher.
Boost in Foreign Reserves
The new Reserve Bank of India’s (RBI) Governor Dr. Raghuram Rajan took some crucial measures to arrest the slide in the rupee and boost the country’s foreign exchange reserves.

RBI liberalized its financial markets to attract more foreign investors by making it convenient for Indian banks to borrow from overseas and by offering programs to lure overseas Indians to put their money in local bank deposits.
These measures enhanced India’s foreign exchange reserves to $291.3 billion for the month of November from $282.9 billion in the preceding month, representing a third consecutive monthly rise.
Positive Economic Indicators
India’s manufacturing activities are slowly getting back on track. The HSBC Manufacturing Purchasing Managers’ Index (PMI) rose to 51.3 in November, the highest level since March. Importantly, any climb above 50 indicates that the economy is expanding. (read: 3 ETFs to Profit from the Manufacturing Upswing)
Exports for November rose 5.86%, while imports fell 16.37%. This positive data narrowed India’s trade deficit. Moreover, falling crude prices also provided some relief to India’s import bill.
Market Impact
The positive economic indicators and the election euphoria pushed the Indian ETFs northwards in the last one month. The Market Vectors India Small-Cap ETF (SCIF - Free Report) surged around 8% in the last month, while the iShares India 50 (INDY - Free Report) and PowerShares India (PIN - Free Report) increased around 7% and 5% respectively. (read: India Small Cap ETFs Back on Track?)
Moreover, the brake on Fed taper helped SCIF to gain around 15% over the last three months, while INDY gained 10% and PIN added 7% over the same time frame.
Also, all the 11 Indian ETFs delivered positive returns in the preceding month. However most of these ETFs are still in the negative terrotory if we look at the year-to-date time frame.
Forthcoming Events and Other Factors
Easy money policies in the developed countries have played a major role in the equities’ bull run. Though the Fed deferred its decision with the taper program, a chain of favorable economic reports published of late suggests that the U.S. economy is gaining strength. The capital goods and the manufacturing sector in the U.S. are picking up. Moreover, unemployment rate fell to a 5-year low of 7%.
These positive economic data might prompt Fed to start tapering sooner than later. As the Indian markets are majorly driven by FIIs, Indian ETFs might be impacted by Fed's decision to wind down its asset purchases
Apart from taper worries, India’s inflation still remains above RBI’s comfort zone, which might prompt it to hike interest rates in its next mid-quarterly review on Dec 18. The hike in rates might dampen investor sentiment in the short term.
Moreover, the general election, scheduled to be held next year, might also play a vital role in determining the direction of Indian equities. Even if the existing government's failure to come to power proves to be a blessing for investors, they should remember that any economic recovery overnight is well-nigh impossible.
Bottom Line
Even though taper concerns are looming large over emerging economies like India, market experts believe that India is better poised now to tackle with the QE taper. The falling current account deficits have somewhat eased concerns about financing India’s current account deficit. (read: Taper Concerns Put Focus on Homebuilder ETFs)
Nevertheless, with markets at all time high, investors having India ETFs in their portfolio should be a little cautious for the next few months.
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