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India has been one of the best-performing markets in 2014 on both domestic and international investors' optimism that the new prime minister is going to foster more business-friendly reforms. The MSCI India Index is up about 25%, while the Morningstar India Equity category is a whopping 45% higher year-to-date. 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. The country pays out a considerable amount of fuel subsidies to citizens, and government has had a hard time cutting these subsidies. These subsidies have weighed on the fiscal deficit, they've hindered the country's ability to invest in infrastructure, and they’ve 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 wouldn’t have such a large impact on the end consumer.
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. The result is that consumers feel more confident, with more cash in their pockets. These improving macroeconomic trends combined with Prime Minister Modi's ambitious reform programme might create a virtuous cycle and help set the stage for India's long-awaited next phase of growth.
Top-Rated India Funds
If you feel that your portfolio deserves some exposure to India, there are several India ETFs available on the London Stock Exchange. Db x-trackers MSCI India Index UCITS ETF is the cheapest, with an annual ongoing charge of 0.75%, while Amundi ETF MSCI India UCITS charges 0.80%. Both track a cap-weighted index. Among the actively-managed strategies, three India equity funds have earned a forward-looking, Morningstar Analyst Rating of Silver: Comgest Growth India, Fidelity India Focus and Franklin India. Investors preferring a closed-end fund structure will find one investment trust that has earned a positive Morningstar Analyst Rating; JPMorgan Indian Investment Trust is rated Bronze.
Morningstar.co.uk managing editor Holly Cook contributed to this article.