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India ETFs Gain After Rate Cut

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The move could pump $3.3 billion into the Indian banking system.

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Editor's Note: This content was originally published on Benzinga.com by The ETF Professor, Benzinga Staff Writer.

The WisdomTree India Earnings ETF (NYSEARCA:EPI) and the PowerShares India Portfolio (NYSEARCA:PIN) are among the marquee India funds trading higher Tuesday after Asia's third-largest economy announced an interest rate cut. EPI and PIN are each higher by about half a percent on the news.

Overnight, the The Reserve Bank of India pared its benchmark interest rate by 25 basis points to 7.75%. The move, though widely expected, is RBI's first rate cut in nine months. In a surprise move, RBI also pared the cash reserve ratio, or the amount of deposits Indian banks must keep with the central bank, by 25 basis points to 4%.

That could pump an added $3.3 billion into the Indian banking system, Reuters reported.

This is the second time RBI has lowered the cash reserve ratio since the third quarter of 2012 and the news comes at a time when Indian banks are dealing with a rising number of bad loans.

The ratio of bad debt at Indian banks jumped to its highest level in at least five years at the end of the third quarter, Bloomberg reported last week.

Increased liquidity has the potential to bolster the financial positions of Indian banks, which make often make up sizable portions of the major India ETFs. For example, the $1.29 billion EPI devotes nearly 27% of its weight to financials while that sector accounts for 17.6% of PIN's weight.

The iShares S&P India Nifty 50 Index Fund (NASDAQ:INDY) allocates about 21.2% of its weight to financial services names.

Even with the rate cut and reserve ratio announcements, RBI offered up a good news/bad news outlook on the Indian economy. Already enduring slowing growth after years of being home to one of the most torrid growth clips in the developing world, India is projected to slow further in the current fiscal year.

RBI lowered its growth estimate to 5.5% for the current fiscal year from 5.8%. The good news is that the central bank also slashed its March headline inflation estimate to 6.8% from 7.5%.

Inflation, long a problem for India's domestic economy and equity markets, is seen as cooling. However, news of the lower headline inflation estimate from RBI is only having a minimal impact on India small-cap ETFs today, which offer noticeable exposure to the Indian consumer.

The Market Vectors India Small-Cap Index ETF (NYSEARCA:SCIF) is up just 0.21% while the EGShares India Small Cap ETF (NYSEARCA:SCIN) is higher by just 0.32%.

SCIF allocates about 27% of its combined weight to discretionary and staples names while SCIN has about 21% exposure to the Indian consumer.

While SCIF and SCIN are not as big or heavily traded as their large-cap counterpart, the two may offer a cautionary tale about the near-term outlook for Indian ETFs. EPI, INDY and PIN are all in the green since the start of 2013. SCIF and SCIN are down 5.3% and 4.3%, respectively, and that is including today's gains.

Both funds have recently fallen below their 20- and 50-day moving averages, and in the case of SCIF, that fund is only about 4% above its 200-day line.

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