India ETFs In A Tailspin With Rupee

Includes: EPI, ICN, SCIF
by: Tom Lydon

Emerging markets have been underperforming this year, and India exchange traded funds are bringing up the rear as structural problems plague the economy and "tapering" concerns push away U.S. investors.

The WisdomTree India Earnings Fund (NYSEARCA:EPI) declined 26.8% year-to-date. Small-caps were especially sensitive to the exodus out of India, with Market Vectors India Small-Cap Index ETF (NYSEARCA:SCIF) falling 45.6% year-to-date.

Additionally, the Indian rupee has weakened, depreciating as much as 4% in one day and exacerbating the drop in India-related ETFs - India ETFs track rupee-denominated equities, so a weaker rupee translates to an even lower return when converted over to the U.S.d dollar. The WisdomTree Indian Rupee Fund (NYSEARCA:ICN) is down 11.1% year-to-date.

India's central bank recently announced a series of measures to limit capital flight as a way to protect the domestic currency, writes Neena Mishra for Zacks. However, the added measures have only dissuaded foreign investors from diving into the Indian markets on fears that more capital controls could be implemented in the future.

Fed tapering concerns have also pushed investors away from emerging market investments as many start thinking about an end to years of easy money.

The Indian economy expanded 5% during the 2012 to 2013 fiscal year, its lowest growth in a decade, compared to the 8% average rate between 2006 to 2011. The International Monetary Fund now expects the economy to grow 5.7% this year. Additionally, the economy is fighting against a 10% consumer inflation level.

There are structural problems weighing on India's economy such as slowing growth, high inflation and a widening fiscal and current-account deficit.

However, the weak rupee could support growth in exports. Taxes on gold imports could help the country reduce its current account deficit. Additionally, reputable economist Dr. Raghuram Rajan has been elected as the next governor for the Reserve Bank of India.

WisdomTree India Earnings Fund

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.