Are India ETFs In For A Rough 2017 Thanks To Modi?

India ETFs – once a hot investment destination on pro-growth political changes in 2014 – have had a downbeat 2016. Hardly any fund is in the positive zone this year. Let’s take a look at what hit India ETFs this hard.

Demonetization

The event that put the Indian economy on global headlines of late was currency demonetization in early November, when as much as “86% of Indian currency and 12% GDP got stalled overnight.” As per the announcement, the Indian government withdrew high-denomination banknotes – 500 rupee and 1000 rupee notes – in circulation, as part of a crackdown on illegal money, dealing a heavy blow to the finances of militants targeting India.

The immediate impact will be on inflation as eradication of unaccounted and untaxed money will have a deflationary effect. Some even view the step as an unplanned form of policy tightening, though India has been resorting to rate cuts in recent times to boost growth.

With the demonetization move, the Indian economy is presently going through a cash crunch. Some analysts in fact have cut India’s GDP growth forecasts. Fitch rating reduced India’s GDP forecast to 6.9% from the prior estimate of 7.4% for the current financial year while Bank of America Merrill Lynch slashed forecasts by about 50 bps to 6.9% for fiscal 2017.

Trump Win & Fed Hike

If this was not enough, Donald Trump’s win is likely to cause uncertainty in the coming days for a few foreign economies including India. This is because Trump has a harsh stance on immigration and offshoring in his campaign. With outsourcing making up about 20% of India’s exports of goods and services, uncertainty looms large for India.

Plus, the Fed enacted its second rate hike in almost a decade in mid-December and plans to pass three more in 2017 as of now. As a result, the greenback and the U.S. treasury bond yields are on an uphill ride. This in turn is likely to mar the relatively higher-yielding emerging market securities, like those tied to India.

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