Indian Central Bank Cuts Key Rates: ETFs To Buy

Reserve Bank of India, the primary banking authority of India, has cut the repo rate to a nearly seven-year low. Repo rate is the rate at which the Reserve Bank of India (RBI) lends to commercial banks.

The repo rate was slashed by 25 basis points to 6%. The reverse repo rate was also adjusted to 5.75%. The reverse repo rate is the rate at which the RBI borrows from commercial banks.

The monetary policy committee of the RBI slashed the short-term lending rate owing to pressures the economy faced due to consistently falling inflation and weak demand. Weak demand was primarily driven by the ban of high-currency notes last year by the Indian government and is expected to be transitory.

India’s inflation slowed to a record low of 1.54% in June compared with 2.18% in May, a five-year low, primarily owing to lower food prices. Since the inflation is well below RBI’s target of 4%, the rate cut is expected to spur consumer spending, thereby increasing inflation (read: India Inflation at Record Low: ETFs in Focus).

Moreover, India’s GDP grew at 6.1% annually in the January-March quarter of 2017, a two-year low. The recent rate cut is expected to put pressure on banks to reduce interest rates on loans, thereby spurring business activity.

Adding to the agony, India’s manufacturing Purchasing Managers Index (PMI) hit an eight-year low in July. Nikkei India Manufacturing PMI for July was at 47.9 compared with 50.9 for June. A reading below 50 indicates contraction.

This is being attributed to the recent introduction of a major tax reform by prime minister Narendra Modi’s government. From July 1, 2017, the Indian economy adopted a unified tax code, the Goods and Service Tax (GST). Economists predict that this is expected to bode well for the economy in the long run. However, short-run shocks are expected as businesses get accustomed to the new code (read: India to Unify Tax: Near-Term Pain/Long-Term Gain for ETFs).

Despite these headwinds, the long-run forecast for the Indian economy remains strong. The International Monetary Fund (IMF) sees the Indian economy growing at 7.2% in 2017 and at 7.7% in 2018.

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 $5.42 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 23.64%, 13.51% and 12.77% allocation, respectively (as of August 1, 2017). Housing Development Finance Co, Reliance Industries Ltd and Infosys Ltd are the top three holdings of the fund, with 9.40%, 7.29% and 6.48% allocation, respectively (as of August 1, 2017). The fund has returned 18.63% in the last one year and 29.47% year to date (as of August 2, 2017). INDA currently has a Zacks ETF Rank 2 (Buy) with a Medium risk outlook (read: Why India ETFs are Soaring in 2017).

WisdomTree India Earnings Fund (TO:EPI)

This fund provides exposure to Indian equities in multiple capitalization segments.

It has AUM of $1.79 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 25.74%, 21.29% and 16.10% allocation, respectively (as of August 2, 2017). Reliance Industries Ltd, Housing Development Finance Co and Infosys Ltd are the top three holdings of the fund, with 12.17%, 6.55% and 6.54% allocation, respectively (as of August 2, 2017). The fund has returned 26.13% in the last one year and 32.13% year to date (as of August 2, 2017). EPI currently has a Zacks ETF Rank 2 with a Medium risk outlook (read: India ETFs: More Run Ahead?).

iShares India 50 ETF (JK:INDY)

This fund provides exposure to large-cap Indian equities.

It has AUM of $1.18 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 27.19%, 11.05% and 8.96% allocation, respectively (as of August 1, 2017). Housing Development Finance Co, Reliance Industries Ltd and ITC Ltd are the top three holdings of the fund, with 7.47%, 7.02% and 6.44% allocation, respectively (as of August 1, 2017). The fund has returned 22.31% in the last one year and 31.97% year to date (as of August 2, 2017). INDY currently has a Zacks ETF Rank 2 with a Medium risk outlook.

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