India ETFs have been under pressure over the past three months (as of Aug 26, 2019) mainly on a volatile global market backdrop, a rising U.S. dollar, slowing economic growth, irregular monsoon and a liquidity crisis in the shadow banking sector.
The pain increased when Moody's cut India's 2019 GDP growth forecast by 60 bps to 6.2% and 2020 GDP growth forecast by 60 bps to 6.7% recently. Earlier this year, Moody’s had forecast India to grow 7.3% in calendar year 2019 and 2020 on account of government spending ahead of general elections.
Some Positive Moves in Store?
However, India ETFs appeared to have received a lifeline as the country’s government got INR 1.76 trillion ($24.4 billion) from its central bank RBI. This funding may “act as a cushion against the possible shortfall in revenue collection in FY20," said Madan Sabnavis, chief economist at CARE Ratings. Such funding grant also increased hopes of stimulus.
Also, the finance Minister Nirmala Sitharaman “scrapped a tax on global funds, allowed concessions on vehicle purchases and hastened an infusion of an already announced 700 billion rupees ($9.8 billion) of capital in state banks.”
Apart from these efforts, India has been cutting interest rates drastically this year. On Aug 7, RBI slashed repo rate for the fourth time this year as benign inflation gave the central bank a leeway to resort to easy money policy to boost an economy that is expanding at its slowest in nearly five years.
In the latest cut, repo rate was lowered by 35% basis points to 5.4%. The cut was sharper than expected as about 80% of 66 economists surveyed by Reuters expected RBI to cut its benchmark repo rate by 25 bps while three forecast a 50-bps cut (read: Will Fourth Rate Cut in 2019 Help India ETFs Recover?).
Thanks to the latest rounds of stimulus talks, India ETFs gained on Aug 26. Small-cap ETFs that are more closely tied to the domestic economy gained more. iShares MSCI India Small-Cap ETF (SMIN - Free Report) and VanEck Vectors India Small-Cap Index ETF (SCIF - Free Report) added 2% and 2.1%, respectively on the day.
Large-cap ETFs likeiShares India 50 ETF (INDY - Free Report) (up about 1.8%), iShares MSCI India ETF (INDA - Free Report) (up 1.6%), Invesco India ETF (PIN - Free Report) (up 1%) and WisdomTree India Earnings Fund (EPI - Free Report) (up about 1.5%) have also put up a decent show (see all Asia-Pacific (Emerging) ETFs here).
What Lies Ahead?
However, the latest jump seems to be short-term one as the global market backdrop remains edgy on U.S.-China trade tensions. The U.S. dollar has been stronger this year, which is a negative for the emerging market pack. Also, India’s GDP growth picture and corporate earnings are anything but great. So, the run ahead for India ETFs could be a little rough (read: 5 International ETFs That Lost Less Than SPY on Trade Worry).
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