Indian stocks and weighting in MSCI EM index on the rise, shows data

Over $400 billion in assets under management are said to be benchmarked to the MSCI EM index.

India’s weighting and the number of domestically listed stocks in the widely tracked MSCI Emerging Market (EM) index have seen a considerable increase in just 13 months. In October 2020, India’s weighting was around 8.1 per cent, and 87 stocks were part of the index. By the end of November 2021, the weighting increased to 12.3 per cent and the number of stocks jumped to 106.

This has helped channelise a significant amount of foreign flows into the country. Over $400 billion in assets under management (AUM) are said to be benchmarked to the MSCI EM index. As a result, a 420-basis points increase in weighting will help attract $42 million for every $1 billion of incremental flows.

“The two factors that have driven fresh inclusions and an uptick in the weighting. The new regime on foreign ownership limit (FOL) and domestic stocks’ strong outperformance to other emerging market counterparts,” says Abhilash Pagaria, head, Edelweiss Alternative & Quantitative Research.

The previous three rebalancing of the MSCI EM index in November 2020, May 2021, and November 2021 saw a net addition of nine, five, and five Indian stocks, respectively. Some of the stocks that got added during the last semi-annual index rebalancing (SAIR) include IRCTC, SRF, Tata Power, and Zomato. In the forthcoming SAIR in May, however, not many changes are anticipated.

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. The move increased investment legroom for FPIs in several Indian stocks. This promoted global index providers, such as MSCI and FTSE, to increase India’s so-called foreign ownership limits (FOL).

 In terms of absolute market cap, India is the third-biggest stock market in EMs, after China and Hong Kong. However, the country’s weighting in the EM index is below that of Taiwan and is neck-and-neck with South Korea. This is because the MSCI takes into consideration factors, such as FOL and free-float market capitalisation -- which in India’s case is lower than markets such as Taiwan and South Korea.

The MSCI EM index captures large- and mid-cap representation across 25 emerging markets. It has 1,420 constituents and covers about 85 per cent of the free-float market cap in each country.