Inflation Could Hinder India’s ETFs

Despite witnessing stellar economic growth over the past two years, rising prices could put a damper on India’s future.

In March 2010 India’s consumer prices rose 14.9 percent when compared to a year ago, marking the largest increase of any G-20 nation.   This drastic increase in prices has been led by a surge in food prices which has been brought on by pure supply and demand forces.  With a drier than normal monsoon season, an absence of rainfall took its toll on rice, wheat and other crops, decreasing supply.  In fact, the Asian nation has seen per capita food grain production drop to levels seen in 1950. 

On the demand side, an increase in per capita income and a widening middle class are pushing up demand for food.  Over the past decade, per capita income in India has increased by 56 percent and the nation’s middle class is fast becoming accustomed to Western culture, further supporting demand for meat which requires more grain to produce.

To make things even more challenging, history indicates that rising prices results in political instability for India.  In 1998, a shortage in onions sent prices out the roof and prompted voters to unseat the state government in the Delhi region.  A similar situation arose in 2004 when high food prices enabled the Congress party to upset the Bharatiya Janata Party and most recently protestors filled the streets in Delhi when news that inflation has reached a new peak leaked out.

Although the Indian government is doing what it can to curb inflation by increasing interest rates, the underlying driver behind this predicament is the shortage in food and water supply, which is preventing many from not having enough to eat.

Some equities that are likely to feel the wrath of inflation in India include:

  • WisdomTree India Earnings Fund (EPI), which is designed to measure the performance of companies incorporated and traded in India that are profitable.  EPI closed at $22.81 on Tuesday.
  • PowerShares India Portfolio (PIN), which seeks to replicate the Indus India Index and boasts Reliance Industries Inc. as its top holding.  PIN closed at $22.25 on Tuesday.
  • iPath MSCI India ETN (INP), which is a senior, subordinated debt instrument that gives exposure to the Indian markets.  INP closed at $64.42 on Tuesday.

If invested in these equities, an exit strategy which identifies specific price points at which enhanced risk is prevalent is of importance.  According to the latest data at www.SmartStops.net, these price points are as follows: EPI at $21.60; PIN at $21.00; INP at $61.02.

These price points change on a daily basis and are reflective of market conditions.  Updated data can be found at www.SmartStops.net.

Disclosure: No Positions

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