From the June 1st till yesterday the Indian equity ETFs had fallen more than 6% below S&P 500, considering their beta values. Today the trend is opposite.
The downtrend was recorded especially among the small-cap equities. The Market Vectors India Small-Cap Index ETF (SCIF) declined about 10% below S&P. There is a number of reasons for this downtrend.
Firstly, the worse-than-expected data, such as disappointing quarter earnings. The investment is weak and the exports is falling. The Reserve Bank lowered the economic growth projection for the current fiscal year from 7.8% to 7.6%.
The RBI also lowered the interest rates, for the third time this year. The key interest rate was decreased by 25 basis points to 7.25%. However, it was not very helpful for the equity market, probably because of the Bank's warning of an inflation risk due to the drought predictions and rising oil prices. Growing inflation would stop any further rate cuts. A drought would also lower the farmers' consumption power.
Furthermore, the government did not pass the long-awaited landmark reform bills and Morgan Stanley estimates that because of the rising number of bad loans the state-owned banks should be given $14-15 billion capital injection.
The passive money was going to China. However, active investors started to bottom fish India. Today the 10-day downtrend seems to be over. At the end of the day, despite all the current problems, India may become the world's fastest growing economy this year. With good demographics and quite firm government it may be an excellent long-term investment target.