The best emerging market to buy now

This Thursday's Bank of England interest rate decision has investors' mouths watering. Even more money-printingseems to be on the cards.

Yet sometimes it's better for a central bank to stop dishing out sweeties and take a tough line with its government.

The European Central Bank's refusal to act dramatically to stem the eurozone crisis has forced politicians to make more effort to find a solution. They don't like it, but it's the only hope of finding out if the European project' will ever actually work.

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Similarly, India's central bank has been standing firm against its government too: interest rates were left sitting at 8% at its last meeting a couple of weeks ago, despite a rapid slowdown in the economy.

The good news is that this could be just the kick in the backside that India's paralysed government needs to get the country moving again.

And that could be very good news for investors in India.

The mythology of the Brics

The grouping together of the BRICs countries (Brazil, Russia, India and China) was always more of a crafty marketing slogan than anything else. But while everything was rising together, it was easy enough to just lump all the emerging markets into one big group.

Today, you need to be more discriminating. You probably already know what we think of China- the country has been overly dependent on demand from overseas consumers, who are now in trouble. Its infrastructure-spending boom which took over as the main driver of growth after the 2008 crash has run its course too.

So it needs to change strategy again. But trying to run the Chinese economy on internal consumer demand alone is not going to be an easy shift, particularly when the economy is trying to cope with a bursting property bubble.

China's loss of appetite for raw materials is in turn bad news for commodity-dependent countries. That includes Brazil and Australia, which have both ridden the commodity supercycle higher and now have big consumer credit bubbles to worry about.

As for Russia, it's cheap, but it's still too reliant on oil. I'm sure there's money to be made there, but you have to have your wits about you. In short, most of the big emerging market stories of the past decade have been heavily linked to the commodity cycle, which in turn has been driven by China.

But one Bric is very different. India's problem, as Rahul Saraogi of Atyant Capital points out, "is the exact opposite of China and [the] commodity-exporting countries". China's problem is one of over-capacity it has over-invested; India on the other hand, "has chronic short supply of everything."

Inflation is high at well over 7%. The government is weak and is making little or no progress in getting rid of barriers to investment, or improving infrastructure. Economic growth fell to 5.3% in the first quarter, against an expected 7%. Meanwhile, the rupee has fallen to a historic low against the US dollar.

That all sounds pretty grim. And it is.

How to invest in India

But the good news is that India stands to benefit from falling oil prices. Meanwhile, the weak economic figures are pushing the government to act. Prime Minister Manmohan Singh took over the finance ministry last week; that encouraged investors because he helped India's economy turn around when he was finance minister in the 1990s.

Saraogi believes it would only take a change of sentiment towards India for the market to rally sharply. Indeed, it has already seen a decent bounce in June, helped by Singh's move. As Citywire pointed out last week, Sanjiv Duggal of HSBC GIF Indian Equity fund the world's largest India fund has also been buying in.

Sanjiv has previously warned in December 2007 against buying India when he felt it was overvalued, so he's no perma-bull. But now he feels that buying is a good move.

"This is the worst sentiment has been in the 16 years I have been running the fund", he says. "Investors should take advantage of the weak currency and the risk/reward profile is very favourable from a medium-term perspective."

I wouldn't stake a huge amount of your portfolio on it (5% is what I'd be looking at). India will remain tied to the risk-on', risk-off' cycle as investor fears over Europe and the US rise and fall. The country's leaders have also shown a real aptitude for disappointing (although they're hardly unique one that score).

But as an emerging market which will benefit, rather than suffer, as the commodity supercycle slows, I think India is worth dripping at least some money into. One option we've always liked is the Aberdeen New India Investment Trust (LSE: NII), which is trading at a discount of just under 10%, about in line with the average. We looked at other ways to get access to India's market back in January.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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