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India’s growing heft in MSCI EM index: what it means for the market


India’s weightage on the MSCI emerging markets (EM) index is tipped to rise to 16.3% from the current 15.88% with nine fresh stock inclusions in the gauge. The addition, effective 30 November, will take India’s representation to an all-time high of 131 stocks. Mint explains:

Why is the MSCI index important?

MSCI is a standalone NYSE-listed global index, whose stock indices are widely tracked by global asset managers, hedge funds, banks, corporates and insurance companies to allocate funds across global stock markets. The indices are widely used for passive investment by exchange traded funds, index funds and some fund of funds. Passive fund returns mirror index returns unlike active funds which can beat or underperform benchmarks. Some of the most tracked of its several indices are the All Country World Index, the Frontier Markets Index and the EM Index, launched in 1988, with India included in 1994.

How has India fared on the EM index?

India has grown over the years with its weight set to double to 16.3% from four years ago once the latest rejig takes effect. It is second only to China, whose weight as of October-end was 29.89%. India leads Taiwan (15.07%), South Korea (11.78%) and Brazil (5.42%). As a standalone country, India has outperformed the benchmark EM index in terms of generating net returns of 4.75% in the year through 31 October against a negative 2.14% return by MSCI EM. The longer-term performance is even more impressive, with net returns of an annualized 8.33% in 10 years against just 1.19% annualised returns by MSCI EM.

Graphic: Mint

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Graphic: Mint

How does a stock find a place on the index?

The stock weights on EM index are based on free float market capitalization, or the shares available for buying and selling by foreign investors. The higher the market capitalization, the higher the weight and the allocation by investors. Reliance Industries (weight 1.34%), ICICI Bank (0.91%) and Infosys (0.87%) are among the top 10 stocks on MSCI EM.

How will increased representation help?

Passive foreign trackers will put $1.5 billion into the nine Indian stocks in the index and other Indian counters whose weights will rise. MSCI increased the weights of Zomato, Hindustan Aeronautics and Jio Financial Services, to name a few, which will receive an estimated $160 million worth of passive flows. The rebalancing means that heavyweights like Reliance will see minor weight reductions, according to brokerage Nuvama, which estimates outflows of $645 million from the top five counters.

Will overall FPI investment rise?

The increase will see inflows from passive trackers and not necessarily active fund managers. So, it doesn’t mean that overall foreign fund flows will rise. To be sure, it’s a sentiment booster. Over longer periods, passive investments tend to generate higher returns because of lower expenses and absence of human error. The latest positive review by MSCI EM comes almost a month after foreign brokerage Morgan Stanley upgraded India to the status of most preferred emerging market.

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