Indian equity markets got a big boost recently following a surprise rate cut last weekend by the Chinese central bank. The People’s Bank of China (PBOC) cut the one-year benchmark lending rate by 40 basis points to 5.6% and the deposit rate by 25 basis points to 2.75%.
This is the first rate cut by the Bank of China in more than two years and has raised hopes that it might trigger a fresh cycle of aggressive policy measures by the country to fight dwindling growth. China’s growth rate has been faltering lately, with its economy expanding by 7.3% in Q3, the lowest in more than five years.
Simultaneously, the European Central Bank (ECB) President Mario Draghi also surprised the markets by declaring his firm commitment to fight deflationary pressures in the Euro zone by bringing about more stimulus measures.
Indian Market Reaction
The surprise rate cut by China and the positive commentary by the ECB led India’s benchmark indices – Sensex and Nifty – to touch new highs on the first trading day of the week. The measures have raised hopes that cooling inflation in India might also prompt the Reserve Bank of India (RBI) to ease its monetary policy ahead of the policy review due December 2 to spur economic growth.
The RBI has held the repo rate steady at 8% after raising it three times from September 2013 through January 2014 to fight inflation. However, consumer inflation in India has eased to a five-year low of 5.52% in October from a high of 11.16% seen in November 2013.
India’s Finance Minister also believes that a rate cut would provide a “good fillip” to the economy. Moreover, there are high hopes that Prime Minister Narendra Modi’s government would bring about big-bang reform measures in the winter session of the parliament, which has kicked off on November 24.
Given the elevated hopes of a rate cut from the central bank and reform measures from the Indian government, Indian ETFs have been performing quite well lately.
Below we have highlighted three India ETFs which might get a boost if the RBI does join the band of countries opting for easy monetary policies to fuel growth.
This fund tracks the Market Vectors India Small-Cap Index, holding 94 securities in its basket.
Market Vectors India Small-Cap Fund (SCIF)
This fund tracks the Market Vectors India Small-Cap Index providing exposure to a basket of 102 small cap Indian companies. The product is well spread out across each component as each single security makes up for less than 3.7% of assets.
From a sector look, financials and consumer discretionary take the top two spots with 27.4% and 22.5% share, respectively, while industrials and information technology make up for the next two spots.
The fund has so far amassed $281.9 million in its asset base while charging 93 bps in annual fees. SCIF has a Zacks ETF Rank of 2 or Buy rating with a High risk outlook.
S&P India Nifty Fifty Index Fund (INDY)
INDY is a large cap centric fund that follows the CNX Nifty Index, which seeks to track the performance of the largest 50 Indian stocks. The ETF has amassed $724.4 million and trades with moderate volumes of roughly 340,000 shares a day.
The fund currently holds a small basket of 53 stocks and is highly concentrated in its top five holdings. With respect to sector holdings, banks and software take the top two spots at 22.6% and 14.7%, respectively, while others make up single-digit allocations.