An unusual play on falling oil prices

As a major oil importer, India's economy is expected to benefit

Patricia Oey 6 November, 2014 | 6:00PM
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Patricia Oey: India has been one of the best-performing markets in 2014 on both domestic and foreign investors' optimism that the new prime minister is going to foster more business-friendly reforms. The MSCI India Index is up about 25%. So, it may seem right now is not the best time to invest in India, but there is a catalyst that may help sustain the current rally--and that is falling oil prices.

Historically, India has had a hard time. They have a lot of fuel subsidies they pay out to their citizens, and they've had a hard time cutting these subsidies. And these subsidies have weighted on the fiscal deficit, they've hindered the country's ability to invest in infrastructure, and also impacted the country's credit ratings. But with falling oil prices, the prime minister saw an opportunity to cut the fuel subsidy at a time when it won't have such a large impact on the end consumer.

And falling oil prices also have a lot of positive knock-on effects on the Indian economy. India imports about 70% of its oil needs, so with falling oil prices we're seeing less pressure on the country's current account, we're seeing inflation fall, and this may prompt the Indian central bank to cut interest rates a little earlier than expected. So, we're seeing consumers more confident with more cash in their pockets. These improving macroeconomic trends combined with Modi's ambitious reform program might create a virtuous cycle and help set the stage for India's long-awaited next phase of growth.

So, for investing in India, a passive option is iShares MSCI India (INDA). It tracks a cap-weighted index and is the cheapest fund for India exposure at 67 basis points. Among the actively managed strategies, there is one that has a Morningstar Analyst Rating, and that's Matthews India (MINDX) and it's currently rated Bronze.

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Patricia Oey

Patricia Oey  Patricia Oey is a senior manager research analyst for Morningstar.

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