India is performing increasingly well on the highly coveted MSCI Emerging Markets Index, which is likely to attract about $3 billion in inflows into the domestic equity markets. The Indian stock market has further narrowed its gap with China as a dominant force in the MSCI Emerging Markets Index. With China’s weight slipping to 24.2% and India’s rising to 19.8%, the two economic giants are drawing closer in this global benchmark. The changes in the index weights will take effect after markets close on August 30.
India’s weight is expected to rise above 20% by the end of November, marking the first time India’s weighting in the MSCI EM index will surpass 20%. This milestone will soon position the Indian equity markets to account for over a fifth of this key emerging market (EM) benchmark, which tracks funds with assets exceeding $500 billion.
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India and Taiwan are emerging as strong contenders to challenge China’s dominance in the MSCI Emerging Markets Index. While China’s influence has waned in recent years, dropping from 40% of the index in 2020, India’s presence has steadily grown. Taiwan, buoyed by its semiconductor industry, is also gaining significant traction.
What is the MSCI EM Index?
MSCI, or Morgan Stanley Capital International, is a leading provider of investment indices. Its Emerging Markets (EM) Index is a key benchmark for investors seeking exposure to developing economies like India. The index comprises stocks from countries classified as emerging markets based on factors such as economic growth, market size, liquidity, and accessibility to foreign investors.
A high ranking in the MSCI EM Index attracts foreign investment flows into emerging markets. When a company is included in or excluded from the index, it can trigger substantial buying or selling pressure on its shares, as many investment funds, particularly index funds and ETFs, closely track the MSCI indices. This shift in rating underscores India’s enhanced reputation and growing prominence in the international investment community.
As inclusion in the index boosts a country’s visibility among global investors, experts believe that India will benefit from this latest development. Increased trading volume due to index fund buying and selling improves market liquidity, which could also benefit the rupee, currently Asia’s worst-performing currency.
Among the seven stocks included in the index are Dixon Technologies, Vodafone Idea, Oil India, Zydus Lifesciences, Rail Vikas Nigam, Prestige Estates Projects, and Oracle Financial Services Software. However, Bandhan Bank was excluded. In addition, HDFC Bank, Bharti Airtel, and Coal India will see their weighting in the index increased, albeit to a lesser extent.
MSCI’s recent index adjustments are likely to funnel significant foreign investment into India, with an estimated $2.7 to $3 billion expected to flow into Indian markets. HDFC Bank is expected to be a major contributor due to its increased weighting. However, potential inflows could have been higher if MSCI had fully included HDFC Bank in the index, as MSCI imposed a lower adjustment factor on the bank.
Over the past few years, India has made strides in improving its weighting in the index. India’s weighting has more than doubled from around 8% in 2017 to the current 19%. It stood at 9.2% compared to China’s 38.7% at the beginning of 2021. The past three years have seen a sharp reversal in the equity markets of these two neighbouring countries. In 2018, only 78 domestic companies were included in the index, but that number is now set to exceed 150.
Since 2021, the MSCI India index has soared by 84%, while the MSCI China index has plummeted nearly 50%. In its latest review, announced on Tuesday, MSCI added seven more Indian stocks to its standard index while dropping 60 from China.
The increased representation in the MSCI indices is expected to channel greater foreign inflows into a broader array of domestic stocks, thereby enhancing market depth and liquidity. India’s increased weightage is a result of a bull market over the past few years, economic growth, and structural inflows. This restructuring occurred despite foreign institutional investors (FIIs) consistently pulling out of EMs and India, while retail investors remained confident in India’s growth story.
However, this increased visibility also brings greater responsibility for the companies included in the index, as they must now adhere to stringent governance standards. Despite global economic uncertainties, India is poised to continue attracting significant foreign investments. Strong earnings growth projections and a buoyant economic outlook are the primary drivers of this optimism, according to Kranthi Bathini of WealthMills Securities.