Interest rate cut may prove bullish for Indian equity ETFs

Oct 10th, 2016 | By | Category: Equities

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Indian equity exchange traded funds could see a boost after the Reserve Bank of India (RBI) cut the country’s main interest rate last week due to lagging global growth.

urjit-patel-governor-reserve-bank-india

Urjit Patel, Governor of the Reserve Bank of India.

The move to cut the repurchase rate by a quarter percent to 6.25% pushed the interest rate to its lowest level in almost six years. In general, lower interest rates spur businesses to borrow more which may fuel company growth. More directly, a stock price may be valued as the sum of its discounted future cash flows. If the discount rate (usually the country’s base interest rate plus a suitable premium) has fallen, the stock price would increase.

Commenting on the reasons behind the rate cut, the RBI committee said: “Global growth has been slowing more than anticipated through 2016 so far, with weak investment and trade damping aggregate demand.”

“Meanwhile, risks in the form of Brexit, banking stress in Europe, rebalancing of debt-fuelled growth in China, rising protectionism, and diminishing confidence in monetary policy have slanted the outlook to the downside.”

While rate cuts were not forthcoming under the stewardship of former Governor Raghuram Rajan, the move to lower base rates directly after the appointment of incoming Governor Urjit Patel suggests the RBI may be increasingly proactive in the future. Many analysts believe future interest rate cuts will be forthcoming. “I believe we are going to see more and more of these rate cuts,” Jack McIntyre, portfolio manager at investment management firm Brandywine Global, told Forbes.

Since reaching a 2016 trough in mid-February, Indian equity ETFs have rallied upwards to October, spurred on by a general improvement in emerging market returns and looser monetary policy around the globe.

The bellwether Indian equity index – the S&P BSE Sensex Index – is up 7.4% year-to-date in domestic currency terms.

As of 30 September, broad emerging market equity ETF inflows have exceeded that of 2010 – $25.7bn in 2016 versus $22.2bn this time six years ago – due to several catalysts, including the momentum of economic reform in India and South East Asia, according to the latest Landscape report from BlackRock.

There are four ETFs that track the MSCI India Index on the London Stock Exchange, from Amundi, Lyxor, db X-trackers and a new fund from Italian wealth management firm Lemanik. The Index tracks 74 companies and has just over a fifth – 21% – in financials, followed by 17.3% in technology and 16% in consumer cyclicals.

The Lyxor UCITS ETF MSCI India USA (LSE: INRL) is by far the largest fund at $1.3bn in assets, but is one of the most expensive at 0.85% per year. The Db X-tracker MSCI India Index UCITS ETF (XCS5) was the first Indian equity ETF to launch in Europe in November 2010, has gathered $132m in assets, and costs 0.75%. It is also the cheapest, compared to fees of 0.80% from the Amundi ETF MSCI India UCITS ETF (LSE: CI2G) and 0.89% from new LAM ZyFin MSCI India UCITS ETF (LSE: MIND), which came to market in September.

Indian equities have performed strongly in 2016 but have not beaten overall emerging markets. The iShares MSCI Emerging Markets UCITS ETF (LSE: IEEM) is up 40.4% over the same period in GBP terms. India makes up around 8.4% of the underlying index.

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