Economic indicators must be tracked by investors in Indian ETFs. This is because such indicators have a direct effect on the returns an investor will receive after investing in such ETFs.
For instance, when India GDP growth rose to 7% in 2019, ETFs in sectors such as technology and consumer goods posted huge profits.
Likewise, when FDI rose to 15% in 2020, the confidence rose up accordingly resulting in a rise in the stock prices within the concerned industries.
GDP Growth Rates
The natural economic indicator to watch when considering investments in Indian ETFs is the GDP growth rate. It is a powerful indicator of economic activity and potential profits in a variety of sectors. Historically, India had rapid GDP growth, especially when the post-liberalization era lasting roughly from the early 1990s. For example, after the introduction of economic liberalization in 1991, GDP growth spiked considerably. This growth directly correlates to the growth of the stock market and potential profits for early investors. As such, looking at the GDP growth rate, a potential investor can see if it is due to time when investing in the equity markets is more favorable.
In recent years, the Indian economy has consistently demonstrated remarkable resilience and the highest rates of growth. For example, India’s GDP growth is expected to be about 6.8% in 2021, according to the World Bank . It demonstrates the scenario where the Indian economy is growing at the fastest rates, while a large number of the world’s largest economies are barely recovering after the recession. The growth of nearly 7% is indubitably encouraging and is a strong economic base for potential investors. In addition, considering that the sectors that are most directly correlating to overall growth are technology and consumer goods, it would make perfect sense to invest in them through ETFs.
John D Rockefeller’s quote “Do not be afraid to give up the good to go for the great” is pertinent in this case. Rather than be afraid to take a possibly formidable risk in the complex emerging markets such as India, there is a possibility to get the relatively comfortable gains obtained by investing in the developed economy. By focusing on GDP growth rates, investors can align their portfolios with the trajectory of the economy and significantly increase their chances of obtaining abnormally high returns.
Export Levels
When deciding to invest in Indian ETFs, it is important to note that while one must focus on the internal economic activities of India, it is equally important to keep track of how India is doing economically according to activities on a global level. A significant indicator of the same is the number of goods or services India exports; their number points to how well India’s economy is doing and how well India is integrated on an international level. High levels of exports typically indicate a strong industrial sector, high foreign demand for Indian products, and India’s competitive place on a global market, or other words, it is beneficial for an investor.
Considering the data into an account, it is easy to observe that India’s export landscape has undergone dramatic changes, especially for markets for pharmaceuticals, textiles, and technology. For example, in the financial year 2020-2021, despite the global pandemonium caused by COVID-19, India’s exports, specifically in the pharmaceutical market, managed to increase by nearly 18%.
“Trade is not about goods. Trade is about information. Goods sit in the warehouse until information moves them,” said C. J. Cherryh . Therefore, it is worth noting that as an investor, it is imperative to analyze the market of sectors predominant within the high number of exports, most likely indicating the most profitable markets for ETFs. Considering the data available, I would suggest investing into ETFs which focus on the markets for Technology and Pharmaceuticals, considering their increased rates of export.
Corporate Earnings Reports
Indian ETF investors always take into account corporate earnings reports as they are a direct reflection of corporate health and market potential. Company reports provide information on a company’s profitability, operating efficiency, and market position. By analyzing the financial disclosures of these companies, investors can determine the strength of the sector and its leading companies. The analysis demonstrates how major IT companies have maintained strong earnings for years, indicating that the IT sector is robust and critical to the Indian economy.
In the fiscal years 2021-2022, Indian IT companies reported double-digit growth in net profit. Due to the acceptance of global digital demands, companies have increased their income. This way of life does not only emphasize the adaptability of the Indian IT sector, but it also suggests that it is an area in which reliable investment may be possible. “These four words every investor would never want to ignore: ‘This time it is different,’ said by Sir John Templeton. This tweet can strike paydirt in the context of earnings report analysis. In particular, when it comes to future behavior, past actions are usually a valuable heuristic. Investors should investigate the company’s earnings to figure out if they’ve been up or down for several quarters.
Monetary Policies
Since monetary policies are the crucial drivers of overall market conditions and economic environment, investors in Indian ETF should consider these policies. These approaches are governed by the Reserve Bank of India which determines such aspects as interest rates, inflation control, and banking regulations. Accordingly, the latter institution significantly influences the rates of investment returns.
More specifically, the reduction of interest rates by the RBI tends to result in the increase in stock prices. Lower rates tend to reduce the cost of borrowing money which encourages spending and investment, stimulates economic growth and, consequently, generates higher market prices. A historical analysis, in this case, implies that after the recent rate cut by the RBI in early 2020, the Indian stock market experienced a massive rally which positively affected the holding of investment accounts in Indian-based ETF relying on stock-equities.
In the words of Sam Ewing, “inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair” . Indeed, inflation is a critical objective of monetary policy, and strategies and policies to curb high rates directly impact investment portfolios. The cases are when high rates of inflation are likely to erode real savings and returns which is why in such cases, the RBI would seek to implement monetary policies to stabilize prices thus causing market volatility.
Inflation Rates
The inflation rate is a vital economic indicator for the investors of the Indian ETFs as it will affect their purchasing power and the return on the investment. Inflation will help investors realize the real growth of the investment in the Indian economy and the overall health of the economy to stabilize or fluctuate.
For instance, a high inflation rate will negatively affect the real returns of the investment when the buying power of the money will go down. On the other hand, moderate inflation is associated with a growing and healthy consumption economy. In 2021, India experienced the inflation rates that ranged around 5% which was within the target range set by the Reserve Bank of India . The inflation rate is an indicator of a controlled and stable economy in which investment will be stable.
Warren Buffet said that, “Price is what you pay. Value is what you get.” To determine the appropriate baskets of ETFs that you will be investing in, you have to adjust your investments according to the inflation rate. High inflation rate should lead you to invest in ETFs with commodities or stocks in technology or health sectors that are less prone to inflation.
Foreign Investment Flows
Foreign investment flows into India are one of the most important economic indicators that anyone looking to invest in Indian ETFs should take into account. These flows represent global confidence in the Indian market, and it goes without saying that they may have substantial impacts on the market’s performance. For instance, robust Foreign Direct Investment signals strong economic fundamentals and is often followed by a bullish stock market.
India has seen significant FDI in recent years, especially in its technology and manufacturing sectors, and this is owing to India’s excellent government policies, as well as a large and skilled labor force . In the past fiscal year 2020-2021, India saw more than $ 81 bil-lion in FDI, more than it has in the last decade, indicating that global investors are confident and increasingly interested in the Indian economy.
Peter Lynch once said, “Behind every stock is a company. Find out what it’s doing.” This advice is particularly salient here because understanding where and why for-eign capital is being invested can give ETF investors crucial intuitions about what sectors are going to grow.
