Capital Markets: Challenges and Developments

India’s Growing Influence on the MSCI Emerging Markets Index


From UPSC perspective, the following things are important :

Prelims level : MSCI EM Index

Mains level : NA

Emerging Markets

Central Idea

  • India’s presence on the MSCI Emerging Markets (EM) Index is set to expand with the inclusion of nine new stocks, effective from 30th November.
  • This development will elevate India’s weightage on the index to 16.3%, reaching an all-time high representation of 131 Indian stocks.

What is MSCI EM Index?

  • MSCI is a globally recognized index listed on the NYSE.
  • It is released and maintained by MSCI Inc., a leading provider of global equity indices, investment analytics, and other financial data and services.
  • Its stock indices are closely monitored by global asset managers, hedge funds, banks, corporations, and insurance companies.
  • They rely on these indices to allocate funds across global stock markets.
  • MSCI indices serve as a foundation for passive investments through exchange-traded funds (ETFs), index funds, and certain fund of funds.

India’s Progress on the EM Index

  • Increasing Weight: India’s weightage on the MSCI EM Index has steadily grown, poised to double to 16.3% from four years ago with the upcoming rebalancing.
  • Second to China: India ranks second, trailing only China (29.89%), on the EM Index, outperforming countries like Taiwan (15.07%), South Korea (11.78%), and Brazil (5.42%).
  • Strong Performance: As an independent entity, India has excelled in generating net returns, boasting a 4.75% return in the year through October compared to MSCI EM’s -2.14%. Over the long term, India has achieved an annualized 8.33% return over ten years versus MSCI EM’s 1.19%.

Inclusion Criteria for Stocks

  • Market Capitalization-Based Weightage: Stocks’ weights on the EM index are determined by free-float market capitalization, which represents shares available for foreign investors to trade. Higher market capitalization leads to greater weight and allocation by investors.
  • Top Indian Stocks: Prominent Indian stocks on MSCI EM include Reliance Industries (weight 1.34%), ICICI Bank (0.91%), and Infosys (0.87%).

Impact of Increased Representation

  • Passive Inflows: Passive foreign trackers are expected to inject $1.5 billion into the nine newly included Indian stocks and other Indian counters with increased weights.
  • Stock Rebalancing: MSCI’s adjustments involve increasing the weights of stocks like Zomato, Hindustan Aeronautics, and Jio Financial Services, potentially attracting around $160 million in passive inflows. However, heavyweight stocks like Reliance may experience minor weight reductions.
  • Overall FPI Investment: The increase primarily benefits passive trackers, and it may not necessarily lead to a surge in overall foreign portfolio investment (FPI) flows. Nonetheless, it boosts investor sentiment, as passive investments tend to offer higher returns over extended periods due to lower expenses and reduced human error.
  • Positive Sentiment: MSCI EM’s positive review of India comes shortly after Morgan Stanley upgraded India to the status of the most preferred emerging market, further enhancing India’s appeal to global

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