Consumer stocks and related exchange traded fund were lead the rally in India equities after an the Reserve Bank of India’s unexpected rate cut to stimulate growth amid receding inflationary pressures.
The EGShares India Consumer ETF (NYSEArca: INCO), which tracks the Indxx India Consumer Index of 30 Indian consumer companies, has jumped 7.9% for the week ended Friday. Meanwhile, the benchmark S&P BSE SENSEX Index only gained 2.4%. The consumer sector has been outperforming the broader market, with INCO up 59.9% over the past year.
India’s central bank reduced interest rates by 25 basis points to 7.75% Thursday, acting ahead of the scheduled RBI policy meeting on February 3, Reuters reports.
“This demonstrates RBI’s confidence in the evolving inflation outlook and it shows that they are putting faith in government’s fiscal consolidation plan,” Radhika Rao, economist at DBS Bank Ltd., said in the Reuters article.
The country has been grappling with run-away inflation. The rate cut suggests a level of confidence in the country’s ability to subdue inflation ahead. The lower inflation outlook would also lend support to local consumers.
Moreover, the country is enjoying the effects of lower energy prices as India, the fourth largest consumer of oil, is a heavy importer. Even with the government reducing its oil subsidies, every dollar drop in oil translated to $1 billion saved in subsidy payments.
“Ultimately, consumers will stand to benefit the most in this environment. You have already seen how much petrol and diesel prices have come down. Basically, they have dropped by 15 per cent from peaks and there could be a scope for another 5-6 per cent, even if crude prices sustain at current levels,” Sanjeev Prasad, senior executive director & co-head at Kotak Institutional Equities, said in a Economic Times article.
EGShares India Consumer ETF
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Max Chen contributed to this article.
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