This was a result of credit rating agency S&P releasing a statement that Indian sovereign debt is on the verge of a downgrade from the lowest rung of investment grade status to junk bond status. This move would bump up the costs of Indian debt and make India the first BRIC nation to be rated below investment grade. Accordingly investors sold off Indian stocks. Here’s a quick chart from the NASDAQ displaying today’s market action in several India ETFs.
India ETFs had been coming off their best week in months as several factors including lower oil prices and a potential interest rate cut created a burst of bullishness. Indeed most India ETFs were up close to 5% last week.
The statement by S&P seemed to take investors off guard. While S&P had downgraded their outlook on India several months ago, it appeared there would be more time before this issue came to a head. Investors were preparing for two important data points to be released by the government later this week – inflation and industrial output – to internally set the tone for Indian markets.
S&P’s statement has stolen the spotlight for now and will force the Indian government and the Reserve Bank of India (RBI) to offer some type of material response before the downgrade occurs. On June 18th the RBI has its next interest rate policy update scheduled and certainly there will be even more pressure on the RBI to decide if lower interest rates are to the benefit of the Indian economy.
S&P has cited several reasons they are concerned about India and have placed its outlook on negative. They include:
- Policy Paralysis In The Indian Central Government
- Slowing GDP Growth
- Downturn In Investor Confidence Due to Economic Policy Setbacks
- Retrospective Tax Changes Under Consideration
For a more detailed and insightful read on these points and others, check out this article out of India by NDTV.
Going forward investors in India ETFs should exercise caution as further downward action could easily occur on the heels of economic data to be reported this week.
Christian Magoon is Publisher of GoldETFs.biz and IndiaETFs.com. He is also CEO of Magoon Capital, a strategic consultant firm to asset managers. Christian Magoon is an ETF insider, having launched over 40 ETFs in the United States to date. A widely recognized thought leader on finance and market issues, Christian regularly contributes to many financial media outlets. Prior to forming Magoon Capital in 2010, Christian was President of Claymore Securities (now Guggenheim Investments), where he built one of the fastest growing and most innovative ETF businesses in the country, gathering more than $3 billion in AUM in three years. He launched more than 40 ETFs, introducing many “firsts” to the U.S. market, including the first Frontier Markets, Sector Rotation, Solar Energy, Timber, BRIC and suite of China focused ETFs. Christian consistently provides his industry insights and knowledge as a commentator in the U.S. media speaking publicly on macro investment issues and ETF related topics. Follow him on Twitter@ChristianMagoon. In 2008, he was named by Institutional Investor News as one of the five people to watch in the U.S. ETF marketplace. In 2011, Financial Planning magazine dubbed Christian an “ETF Pioneer.”