MSCI rejigs index: India's weightage cut triggers passive outflow in market

The latest rejig in MSCI indices could be the reason behind the latest turbulence in domestic markets. 

Earlier this month, the global index provider had announced changes to the MSCI Emerging Market (EM) index, in which it increased the weightage of China-A shares (those listed in mainland China), and added Saudi Arabia and Argentina. 

As part of this rebalancing, India’s weightage in the index was reduced by around 30 basis points (bps). The changes became effective from Wednesday. 

Analysts said the reduction in weightage triggered gross outflows between $600 million (Rs 4,200 crore) and $700 million (Rs 4,900 crore) from the Indian market. 

On Wednesday, the gross selling by foreign portfolio investors was Rs 4,825 crore. After factoring in gross-buying of Rs 4,520 crore, the net-selling stood at Rs 305 crore, the provisional data provided by stock exchanges showed. 

A day earlier, FPIs’ net-selling stood at Rs 500 crore. 

“Selling was seen in several large-cap stocks due to the MSCI rebalancing. On an overall basis, the FPI buying momentum remains strong after the election result, which helped absorb the selling,” said an executive with a foreign brokerage. 

In terms of individual names, Reliance Industries, HDFC, and Infosys are among stocks to have seen passive outflows in excess of $50 million Rs 350 crore) each. 

Prior to the rebalancing, the weightage of China-A shares in the MSCI EM Index stood at 35.8 per cent, while that of Hong Kong stood at 12.3 per cent. 

India has the fifth-biggest weight in the index at 11.1 per cent, after South Korea at 14.6 per cent and Taiwan at 13 per cent.

MSCI is the world’s biggest index compiler. Its EM index alone is benchmarked by global funds with assets of nearly $2 trillion. FPI assets in India through the ETF route are pegged at $40 billion.

The rise in China’s weightage follows the hike in the so-called inclusion factor of China-A shares, from 5 per cent to 10 per cent. 

MSCI plans to raise the inclusion factor in a phased manner, with the next revision due in November. The move will lead to even higher weightage to China, squeezing out markets like India.

Manishi Raychaudhuri, managing director and head (equity research) of Asia Pacific, BNP Paribas, says over a period of time there will be a “massive increase” in China’s weightage. 

“The biggest losers will be South Korea and Taiwan. The impact on India, however, will be relatively less severe,” he said.

Despite India’s market cap being higher than South Korea and Taiwan, it has lower weightage than the two due to MSCI’s methodology. 

“Many investors don’t agree with this (MSCI methodology), and therefore their overweight position has been large on India than the benchmark weight. We have to live with this,” said Raychaudhuri. 

India is among the most overweight market for BNP as it has a weightage of 16 per cent, higher than MSCI’s weightage of 11 per cent.