Reasons and Drivers behind rising weightage of Indian Stocks in the MSCI Emerging Market Index

India’s weighting and the number of domestically listed stocks in the MSCI Emerging Markets index reported a significant upgrade in just 16 months. In October 2020, India’s weighting was around 8.1%, and 87 stocks were part of the index. By the end of February 2022, the weighting increased to 12.4% and the number of stocks jumped to 107.

Here is a 5-point analysis on the Upgrade in India’s position in the MSCI EM Index, what are the key drivers of an uptick in India’s weightage, how it would impact foreign inflows etc.

1. India’s Weightage Upgrade in MSCI Emerging Market Index:

• In October 2020, the weightage of India was around 8.1% in MSCI Emerging Market Index, with 87 stocks. The same grew to 9.7% in May 2021 with the number of stocks increasing to 101.
• In November 2021 for the first time, India’s weightage went up in double-digit mark to 12.3% and it included 106 Indian stocks in the index. Currently, as of February 2022, India’s weightage in the Emerging Index is 12.4% with 107 stocks.

2. Key Drivers of Uptick in India’s Weightage in MSCI EM Index

i) New Regime on Foreign Ownership Limit (FOL):

i) New Regime on Foreign Ownership Limit (FOL):

• On April 1, 2020, the government had relaxed the foreign portfolio investor (FPI) limit for Indian companies to the applicable foreign direct investment (FDI) sectoral limit.
• For Example: If the FPI investment limit in a company was set at 49%, but the sectoral cap was 74%, then under the new framework effective from April 1, 2020, the FPI limit in such a company would increase to 74% (unless the company decides to cap it lower)
• This move increased investment legroom for FPIs in several Indian stocks.  Further, this promoted MSCI to increase India’s foreign ownership limits (FOL)

ii) Strong Outperformance of Indian Stocks vs Other Emerging Counterparts

• India has witnessed a V-Shaped recovery in the economic activities and the markets post-pandemic which has led to the free-float market capitalization of India which is around $3.5 Trillion.
• Due to this outperformance, there is a rise in free-float market capitalization of market capitalization.

3. How Weightage Upgrade would Impact Foreign Inflows into India?

• Asset Under Management (AUM) of around $400 billion is benchmarked towards this MSCI Emerging Index.
• Every $1 billion incremental flow into MSCI EM Index will Attract $43 million of Foreign inflows into India.

4. What is MSCI Emerging Market Index?

• MSCI Emerging Market Index was launched on January 1, 2001.
• EM Index itself is a Dynamic Asset Class that is Designed to dynamically reflect the Evolution of Emerging Markets and Capture the unique growth Opportunities Globally (Emerging Market’s growing economic size, Technological significance, etc.)
• The MSCI Emerging Markets Index captures Large-cap and Mid-cap representation across 25 Emerging Markets (EM) countries.
•   EM countries include: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and UAE
• MSCI EM Index includes 1,420 constituents (Companies) which Cover approx. 85% of the free float-adjusted market capitalization in each country

i) MSCI Emerging Market Index – Top Countries:

• In the context of country-wise weightage, China leads the other countries with a weightage of 31.8%. The free-float adjusted market capitalization of China is $2.3 Trillion.
• Next to China is Taiwan with a weightage of 16.2% and free-float adjusted market capitalization of $1.2 Trillion. India with a weightage of 12.4% ranks 3^rd in the list. Though Total Market Cap of India > Taiwan, % weightage of India < Taiwan, Since, percentage weights are based on 2 factors FOL & Free-Float Market Cap and Free-float Market Cap of Taiwan > India
• South Korea is having weightage of 12.3% in the index, Brazil ranks 5^th with a 5% weightage, and the rest of the countries have a weightage of 22.5%.

5. MSCI India Index – Top 10 Constituents:

The Top-10 Indian companies along with their weightage in the 12.4% of India’s weightage in the EM Index are as follows:

i) Sector weights:

• Among the total weightage of India in the MSCI EM Index, the Financials sector accounts for the highest allocation of 24.2% which is then followed by the IT sector which is having an allocation of 18.4%.
• The energy and Materials sector accounts for the weightage of 11.8% and 10.2% respectively.

Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.