India's GDP Growth At 3-Year Low: ETFs In Focus

India’s GDP grew 5.7% annually in the April-June quarter of 2017, a three-year low. Economists had expected growth around 6.5%, as they had presumed that the fallback due to demonetization would be transitory. The GDP growth in India has declined for six-straight quarters now.

The result was shocking for many given the current economic environment in the country. Oil prices are at a record low. Moreover, Foreign Direct Investment (FDI) is at a record high. FDI into India grew 37% to $10.4 billion in the April-June 2017 period compared with $7.59 billion in the year-ago period. A strong inflow of foreign investments is expected to bode well for the Indian rupee (read: India FDI up 37% in Fiscal Q1: ETFs in Focus).

Reserve Bank of India, the primary banking authority of India, slashed the repo rate by 25 basis points earlier this year. Repo rate is the rate at which the Reserve Bank of India (RBI) lends to commercial banks. The repo rate now stands at 6% (read: Indian Central Bank Cuts Key Rates: ETFs to Buy).

Demonetization: A Failure?

Prime minister Narendra Modi in a bold move, removed 86% of the currency in circulation in November in order to curb corruption and black money. However, recent figures from the RBI indicate that 99% of the banned currency found its way back into the system.

The central bank lost more money printing new notes than the value of notes that were banned. Moreover, 1% of the banned currency not returning to the system is far less from what Modi had anticipated. This led the RBI to cut its dividend payment to the government.

However, the country’s finance ministry is currently looking into some 1.8 million odd bank accounts for suspicious activity during the demonetization struggle.

Goods and Service Tax (GST)

In a move aimed at unifying the country’s tax code, the Indian government introduced a major tax reform earlier this year. In order to move toward a ‘one nation-one tax’ regime, Prime Minister Narendra Modi’s government introduced the GST.

However, GST has weighed on manufacturing activity, as manufacturers were running down inventories on the eve of GST. Analysts expect the weigh down in growth because of GST to be transitory and the long-term effects to be positive.

Government spending and Outlook

Despite the negatives, government spending has increased. Growth in government spending reached 9.5% in the quarter compared with 8.6% a year ago.

Although finance minister Arun Jaitley called the slowdown in GDP temporary and attributed it to manufacturers destocking their inventories, many banks covering the Indian markets have slashed their GDP growth forecast. UBS slashed this year’s GDP growth forecast for India to 6.6% from 7.2% earlier.

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 $5.29 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 23.57%, 13.10% and 12.30% allocation, respectively (as of August 31, 2017). Housing Development Finance Co, Reliance Industries Ltd and Infosys Ltd are the top three holdings of the fund, with 9.53%, 7.36% and 5.98% allocation, respectively (as of August 31, 2017). The fund has returned 12.92% in the last one year and 23.40% year to date (as of September 1, 2017). INDA currently has a Zacks ETF Rank 2 (Buy) with a Medium risk outlook.

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 25.65%, 22.14% and 15.68% allocation, respectively (as of September 1, 2017). Reliance Industries Ltd, Housing Development Finance Co and Infosys Ltd are the top three holdings of the fund, with 12.06%, 6.54% and 6.07% allocation, respectively (as of September 1, 2017). The fund has returned 18.83% in the last one year and 23.40% year to date (as of September 1, 2017). EPI currently has a Zacks ETF Rank 2 with a Medium risk outlook.

iShares India 50 ETF (JK:INDY)

This fund provides exposure to large-cap Indian equities.

It has AUM of $1.16 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 26.94%, 10.76% and 9.40% allocation, respectively (as of August 31, 2017). Housing Development Finance Co, Reliance Industries Ltd and ITC Ltd are the top three holdings of the fund, with 7.60%, 7.12% and 6.43% allocation, respectively (as of August 31, 2017). The fund has returned 14.92% in the last one year and 23.40% year to date (as of September 1, 2017). INDY currently has a Zacks ETF Rank 2 with a Medium risk outlook.

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