iShares India 50 ETF INDY gained 12% over the past six-month period, lagging behind 14% returned by the S&P 500 ETF SPY. Slower growth, lower capex, high inflation – all weighed on the Indian economy and the market. Economists are particularly concerned about the sequential moderation in private consumption, which grew at 6% year on year (YoY) in Q2, down from 7.4% YoY in the previous quarter.
With private consumption contributing 65% to GDP, this slowdown is important.Meanwhile, government consumption showed little change, and investment activity continued its downward trend for the fifth successive quarter as the government aimed to balance fiscal pressures by reducing capital expenditure. The manufacturing sector also faced challenges.
Inflation Concerns Dominate
The spike in October’s Consumer Price Index (CPI) inflation to 6.2% YoY, breaching the RBI's tolerance band, underscores inflation as a key policy focus. Shreya Sodhani, Regional Economist at Barclays, remarked that while weaker-than-expected GDP growth might prompt policy easing, inflation remains the RBI's priority, as quoted on Financial Express.
Corporate Earnings Weakness
Earnings in FY25 could replicate the disappointing performance seen five years ago. Nifty earnings are projected to grow by a modest 5% in FY25, according to a report by Motilal Oswal. This marks the first occurrence of single-digit growth in the past five years, as quoted on Economic Times.
Between FY20 and FY24, corporate earnings had displayed a strong compound annual growth rate (CAGR) of 21%. However, the pace of growth has slowed in the first half of FY25. During the July-September quarter (2QFY25), earnings for the companies covered shrank by 1% year-on-year (YoY), while Nifty-50 earnings grew by only 4% YoY.
Will RBI Cut Rates?
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting on December 4-6 has gained heightened attention following India’s Q2 GDP growth slowing to a seven-quarter low of 5.4%. The weak growth print, coupled with high October inflation, raises concerns over potential rate actions in the near term.
Tanvee Gupta Jain, Chief India Economist at UBS, projected a potential 75 basis points (bps) policy rate cut in the coming months (quoted on Financial Express), citing slowing growth and high real policy rates. She added that recent inflation spikes could ease as food prices stabilize and energy costs decline.
In contrast, JM Financial expects a cautious approach. It forecasts a 20-30 bps reduction in FY25 GDP growth projections due to Q2 weakness but suggests February 2025 as a better time for policy easing. For now, the brokerage anticipates status quo on rates, with liquidity measures to address growth concerns, quoted on the above-mentioned source. Meanwhile, Gaura Sengupta of IDFC First Bank suggested a higher likelihood of a rate cut starting as early as December.
Against this backdrop, investors with higher risk for stomach may tap India-oriented exchange-traded funds (ETFs). These ETFs include: iShares MSCI India ETF INDA, WisdomTree India Earnings Fund EPI andFranklin FTSE India ETF FLIN. All ETFs are flat past month.
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Franklin FTSE India ETF (FLIN): ETF Research Reports
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