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India ETFs Slump on Weak GDP Forecast

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Only a few days back, India ETFs prospered when the RBI, or the Reserve Bank of India, embarked on another rate cutting campaign, slashing the rate in order to infuse liquidity in the economy. This step was seen as a solid attempt to reinvigorate growth in an economy that was seeing the slowest growth rate in a decade India ETFs after Central Bank Rate Cut).

However, the GDP growth rate forecast for the economy paints a different picture for the economy. The Indian government’s outlook for the country could be a sign that the economy is just not on a good growth track.

On Thursday, the Indian government made an announcement that the economy will possibly register annual GDP growth of just 5% in the fiscal year ending in March. The rate is much lower than the growth of 6.2% recorded in the preceding fiscal year (India ETFs: Trouble On The Horizon?).

This implies that the once booming economy that was accustomed to record growth rates in the vicinity of 9% is on the verge of delivering the slowest growth rate in a decade this fiscal year.                                                                                                 

The GDP growth rate forecast also comes in worse than India's finance ministry’s previous projection. The ministry had perceived that the economy would expand at the rate of 5.7–5.9% for the current fiscal year. While the Reserve Bank of India anticipated that the economy would grow at the rate 5.5% this fiscal year.

It should also be noted that India’s service sector output accounts for 60% of India’s GDP. So this possibly adds to the apprehension of the economy as the service sector output growth is expected to fall to the level of 6.6% this fiscal year compared with an 8.2% increase last year (Can India ETFs Continue Their Solid Run?).

The disappointing growth forecast does not seem to end here as manufacturing output for the economy is also expected to follow the decelerating path. Manufacturing output growth is expected to turn up at 1.9% as against 2.7% growth reported last year.

So with these sluggish numbers from the Congress-led coalition government, India ETFs had no choice but to react negatively on the growth expectation for the economy. All India equity based ETFs tracking the economy tumbled following the news, including the following funds:

One of the Zacks Top Ranked ETFs for the region, WisdomTree India Earnings Fund (EPI - Free Report) , lost 1.46% in the last trading session. EPI is by far the largest ETF in terms of asset base and also the most liquid fund tracking Indian equities (Zacks Top Ranked India ETF: EPI).

The fund offers a broader play in Indian equities as it holds a portfolio of 196 securities and appears to be moderately diversified in the top 10 stocks where it has invested 37.93% of its assets.

Among individual holdings, Reliance Industries, Oil and Natural Gas Corporation and Infosys form the top line of the fund and together account for almost 21.7% of the allocation. The fund charges an expense ratio of 83 basis points on an annual basis.

Another Zacks top ranked ETF, iShares S&P India Nifty 50 ETF (INDY - Free Report) , suffered 1.29% on news. The product has amassed a net asset base of $427.3 million. The fund’s asset base is spread across 51 Indian securities which does little to reduce company-specific risk as more than 55% of the asset base go towards the top ten (Zacks Top Ranked India ETF in Focus: INDY).

ITC Limited (8.83%), Reliance Industries Limited (7.68%) and ICICI Bank Limited (7.12%) are the three top elements in the basket.

Among sector allocations, banks take the first spot in the fund and make up a substantial portion of the basket with a share of 20.9%. The ETF is extremely pricey with an expense ratio of 92 basis points a year.

Yet another ETF that dwindled on the tepid growth expectation of the economy is PowerShares India Portfolio (PIN - Free Report) . The fall in the PIN ETF price was comparatively less than the other two ETFs discussed above. The fund closed the day after falling 0.83%.

The fund has built an asset base of $399.3 million since its inception and provides exposure to 51 Indian securities. These 51 securities are mainly from energy, financials and information technology sectors in which the fund assigns more than 60% of the asset base in total (Does Your Portfolio Need An India ETF?).

Among individual holdings, Infosys (10.23%), Reliance Industries (9.92%) and Oil & Natural Gas Corp (8.86%) occupy the top line of the fund. The fund appears to be a bit reasonable than INDY, charging a fee of 79 basis points from investors.

Indian Economy in 2013

Despite the gloomy projection, the Indian economy seems to be poised for positive growth in 2013 as the government engages in several reform measures to revitalize the economy (India ETFs: Getting Back On Track?).

It seems that the effect of the measure will only be visible in the second half of the year thereby leading the economy to end the year on a better-than-expected note.

Notwithstanding the restrained economies of the other BRIC nations, there are global factors at play that would likely boost the Indian economy against all odds. Government actions in the form of implementation of the goods and services tax in addition to power sector improvement would be a catalyst for the Indian economy this year.

If these end up having their desired impact, it could help India to get out of its current slump and return to high growth rates once again in the near future.  

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