India may get $1.3-bn passive flow; MSCI EM weight may rise: Morgan Stanley

In October, the Indian government had issued a circular raising statutory FPI limit of Indian companies to the sectoral foreign investment limit

With India swiftly responding to the delay in notifying sector-wise limits for investment in stocks by overseas investors, analysts at Morgan Stanley now expect MSCI to rebalance MSCI India weight in the emerging market (EM) index to reflect this change along with removing the DR (depository receipts) in the foreign ownership limit (FOL) calculation.

As a result, they estimate $1.3 billion in passive inflows into the Indian equities spread across a bunch of stocks. That apart, there could be active inflow to the tune of $5.7 billion, Morgan Stanley said. (See table below)

In October, the Indian government had issued a circular raising statutory foreign portfolio investor (FPI) limit of Indian companies to the sectoral foreign investment limit, effective April 1, 2020. However, MSCI last week put off the rebalancing and said it would wait for the practical implementation of these changes and the systematic publication of the new sectoral limits applicable to Indian securities before making any changes to the MSCI indices.

A number of listed companies had capped the FPI limit much below the sector limit. READ MORE HERE

However, from 1 April 2020, India moved into a new regime on foreign limits whereby this FPI limit has been increased to the sector foreign limit.

"This change is an attempt to fix MSCI India's low float compared to global markets. Over the next few months, we expect MSCI to rebalance MSCI India weights to reflect this change along with removing the DR (depository receipts) in the FOL calculation. We estimate MSCI India's weight in EM to rise by 55 basis points (bps) and India's foreign inclusion factor (FIF) to rise from 0.39 to 0.42," wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley, in a co-authored report with Sheela Rathi.

As a result, Morgan Stanley estimates nearly a third of current constituents will see an increase in their stock weights whenever MSCI considers this particular rebalancing. A recent note by MSCI had suggested that they would notify the new weights by June 2020-end.

Gainers and losers

Among individual stocks, the top five beneficiaries of this regime change, according to Morgan Stanley, are Larsen & Toubro (L&T), Asian Paints, Bajaj Finance, Nestle India and Divi's Laboratories as they could see the maximum increase in their stock weights in the index.

On a relative basis, large-cap stocks such as Reliance Industries (RIL), HDFC, and Infosys are likely to see the most reduction in weights given the upward rebalancing of beneficiaries.

"The top three stocks that could be inclusion candidates are Kotak Mahindra Bank, Biocon and IGL. The two stocks that could see weight reductions due to removal of DRs are ITC (as FIF goes from 0.28 to 0.24) and Bajaj Auto (as FIF goes from 0.29 to 0.24)," the Morgan Stanley report said.

They expect the the index weights for ITC and Bajaj Auto to be lowered by 0.4 per cent and 0.15 per cent, respectively, from the current levels of 2.1 per cent and 0.6 per cent.