Is The Worst Over For India ETFs?

indiaThe Indian stock market and the currency are currently going through a roller coaster ride, thanks to the internal and external crisis plaguing the economy. The Indian rupee had plunged 29% since the start of the year to a fresh record low of 68.85 against the U.S. dollar on August 28 on concerns of a possible U.S.-led military strike against Syria.

However, the currency has shown some strength after the new RBI governor, Raghuram Rajan, took over office on September 4. The stock index CNX Nifty recovered around 8% from the low of August 28 (India ETFs Rebound on Central Bank Steps).

Though the recent rally in the market points to optimism, there has been a series of events and data that are weighing on the Indian markets at least for the short term.

Key Challenges

Weak GDP & Other Factors

India, which competed with China with its near double-digit growth rates a few years back, has lost its shine in recent quarters due to falling investment growth. India’s economic growth dwindled to a decade low of 4.4% for the first quarter (April-June) of FY 2013-14, against 4.8% and 4.7% economic growth in the last two quarters, respectively.

Slowdown in industrial and services sectors is believed to be the major dampeners to GDP growth. Moreover, the HSBC Manufacturing PMI, which determines the business activity in Indian factories, fell to 48.5 in August from 50.1 in July, reflecting the lowest figure since 2009.

Current Account Deficit 

India’s current account deficit has ballooned to a massive $90 billion from just $8 billion in 2007. The rising dollar is further posing a risk as the import bill of oil and gold – the country’s two biggest imports – might further widen the current account deficit.

External Challenges

Increased chances of Fed QE3 tapering on the back of improving U.S. economy led to huge capital outflows from emerging markets. India is no exception and investors have pulled out around $4 billion from Indian equity markets during the period – May to August (read: 3 Emerging Market ETFs Surviving the Slump).

Inflation & Interest Rates

India’s inflation rate is stubbornly high, above 10%, for more than one year now. As of July 2013, India’s consumer price index stood at 10.85%, down 21 bps sequentially, but still much above the RBI comfort zone. Moreover, supply constraints and heavy dependence on fuel imports have kept inflation sticky. Additionally, a continued fall in rupee will further aggravate inflation forcing RBI to hike interest rates and thereby further hampering domestic growth.

General Election and Other Factors

With the general elections in India due next year, we are concerned that the recent populist measures taken by the government of India, like the food security bill, might further widen the fiscal deficit, leading to a further fall in rupee. Moreover, rampant corruption and crumbling infrastructure are also crippling the economy’s growth prospects.

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