Uncertainty Of Policy Direction Holding Back India ETFs

by: Gary Gordon

A seemingly endless string of interest rate hikes (unlucky 13) and bank reserve increases killed India ETFs in 2011. In fact, investors may not have feared inflation as much as they feared that the Reserve Bank of India would go too far.

Yet a shift in central bank policy bias toward easing has given emerging market watchers reason to revisit the second-most populous country. Back in January, the Reserve Bank slashed the cash reserve mandate by 50 basis points and stopped the streak of 13 consecutive rate hikes. WisdomTree India Earnings (NYSEARCA:EPI) responded with a 33% mega-rally in the first eight weeks of 2012.

Unfortunately, EM enthusiasts may have gotten ahead of themselves. Granted, Indian authorities attempted to fire a loosening-of-credit bazooka on March 10 with a 75 basis point reduction in bank reserves. Yet a mid-quarter March 15 review seemed a bit more conflicted. Not only were there no additional cuts to interest rates, but the reviewers collectively concluded that inflation data would determine the timing and extent of future cuts.

A glass half-full investor might take to heart that the powers-in-charge are only considering rate reductions. There are no more plans for tightening. On the other hand, a glass half-empty investor might recognize that inflation in India is actually getting worse, as crude oil prices surge and the “rupee” loses value against other world currencies. With that backdrop, the Reserve Bank of India may decide it needs to stand pat, not stimulate economic growth through interest rate or bank reserve reductions.

The glass-half empty folks are currently winning. Almost as if the market itself predicted that the Reserve Bank of India would stand pat, or that inflation data would be increasingly painful to look at, India ETFs have experienced abysmal month-over-month returns. WisdomTree India Earnings (EPI) has pulled back roughly 8%.

Nevertheless, if Indian officials follow the path of other emerging markets like China, Brazil and Vietnam, future capital appreciation through India exchange-traded vehicles may be extraordinary. Even with the recent sell-off, India ETFs are some of the biggest year-to-date gainers.

India ETFs in 2012 (1/1-3/16)
Approx %
Wisdom Tree India Earnings (EPI) 25.9%
iPath MSCI India (NYSEARCA:INP) 22.2%
PowerShares India Portfolio (NYSEARCA:PIN) 16.8%
iShares S&P India Nifty 50 (NASDAQ:INDY) 20.9%
India Small Cap Index Fund (NYSEARCA:SCIF) 41.1%

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.