Inflation in India is already slowing under the newly elected Prime Minister Narendra Modi, assuring country-specific exchange traded fund investors that the new administration will keep enacting reforms to support the economy.
Consumer prices increased 8.28% in May year-over-year, compared to a 8.59% reading in April and below economists’ average estimates for a 8.4% gain, Bloomberg reports.
The stubbornly elevated inflation level and high interest rates have pressured consumer demand, which make up over half of India’s economy, The Times of India reports.
Modi’s government is stamping down food costs as part of wider goal to reinvigorate economic growth from a near decade low. The central bank has hinted that it could ease monetary policies if inflation slows faster than expected.
However, the measures could take months before producing results. India ETFs, like, the WisdomTree India Earnings Fund (NYSEArca: EPI), iShares MSCI India ETF (NYSEArca: INDA) and PowerShares India Portfolio (NYSEArca: PIN), have rallied since Modi’s win but have also given back some gains as investors wait to see if the new Prime Minister will put his money where his mouth is. [India Small-Cap ETFs Slump After Election Rally]
Additionally, food prices are at risk ahead of the potentially weak monsoon season that could diminish crop production.
“The key risk to inflation remains in terms of the total rainfall,” Rupa Rege Nitsure, chief economist at Bank of Baroda, said in the Bloomberg article. “The government is talking about reforming the food distribution system and the pace of reforms will matter a lot.”
A separate report revealed that industrial output climbed 3.4% in April, compared to an estimated 1.9% rise.
Modi also promised to bolster the economy through increased investment and clearing the red tape for businesses. The better outlook for the domestic economy would also bolster smaller companies. Investors can gain exposure to India’s small-cap stocks through the Market Vectors India Small-Cap Index ETF (NYSEArca: SCIF), EGShares India Small Cap ETF (NYSEArca: SCIN) or iShares MSCI India Small-Cap ETF (NYSEArca: SMIN).
“There is some possible improvement in the investment cycle going ahead on confidence building,” Anjali Verma, an economist at PhillipCapital, said in the Times of India article. “This kind of data will encourage the government to take steps to boost growth.”
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Max Chen contributed to this article.