India ETFs May Feel Inflation Bite

Rising prices could put a damper on India's future after the country witnessed stellar economic growth over the past two years.
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NEW YORK (TheStreet) -- Rising prices could put a damper on India's future after the country witnessed stellar economic growth over the past two years.

In March, India's consumer prices rose 14.9% when compared with 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 was 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 last 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% 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 of onions sent prices through 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 had 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) - Get Report, 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) - Get Report, which seeks to replicate the Indus India Index and boasts Reliance Industries 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

SmartStops.net

, these price points are as follows: EPI at $21.60, PIN at $21 and INP at $61.02.

Written by Kevin Grewal in Houston

At the time of publication, Grewal had no positions in the securities mentioned

.

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Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.