India just shy of top-weight China in MSCI EM after rejig

The Indian equity markets will soon account for over a fifth of a key emerging market (EM) benchmark tracked by funds with assets exceeding $500 billion.

This development is expected to funnel as much as $3 billion into the domestic markets.

Following the latest review undertaken by global index provider MSCI, India’s weighting in the MSCI EM index will surpass 20 per cent for the first time, narrowing its gap with the current top-weighted China to fewer than 400 basis points.

At the beginning of 2021, India’s weighting in the index stood at 9.2 per cent, against China’s 38.7 per cent.

Over the past three years, however, the equity markets of these two neighbouring countries have diverged sharply — since 2021, the MSCI India index has soared by 84 per cent, while the MSCI China index has plummeted nearly 50 per cent.

In its review announced on Tuesday, MSCI added seven more Indian stocks to its index while trimming 60 from China, a move that will see the world’s second-largest economy’s weighting fall below 24 per cent.

“India’s weighting in the MSCI EM index crossing 20 per cent marks a significant milestone.

"It underscores India’s enha­nced reputation and acceptance on the global stage,” said Sriram Velay­udhan, senior vice-president at IIFL Securities.

"Notably, India's weighting has more than doubled from around 8 per cent in 2017, reflecting the country's remarkable progress and increased prominence in the international investment community,” said Sriram Velayudhan, senior vice-president at IIFL Securities.

Meanwhile, MSCI has lifted restrictions imposed last year on certain Adani group stocks amid concerns over their actual free float.

However, analysts suggest this move will not result in any meaningful change in their weighting.

The rebalancing by MSCI is expected to draw net inflows of between $2.7 billion and $3 billion into Indian markets, according to Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research.

Of this, around $1.8 billion can be attributed to the increased weighting of HDFC Bank in the index.

The passive flows and India’s weighting could have risen even further if MSCI had not imposed a lower adjustment factor on HDFC Bank.

The index provider has said that it will monitor whether the foreign investment room in HDFC Bank remains below the 20 per cent threshold before fully including the lender in the index.

The market had anticipated full inclusion, with inflows of over $3 billion into HDFC Bank alone. Consequently, shares of HDFC Bank dropped by 3.5 per cent on Tuesday.

Back in 2018, India’s weighting in the index was 8.2 per cent, with 78 domestic companies included. That number is now set to exceed 150.

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.

Among the seven stocks MSCI included in the index are Dixon Technologies, Vodafone Idea, Oil India, Zydus Lifesciences, Rail Vikas Nigam, Prestige Estates Projects, and Oracle Financial Services Software, while Bandhan Bank was excluded.

Besides HDFC Bank, Bharti Airtel, and Coal India will also see their weighting in the index increased, albeit to a lesser extent.

The latest changes announced by MSCI will take effect at the end of this month.