MSCI weight of India to increase to 8.4%

With this, foreign investment limit in private banks increases to 74%

India’s weight on the MSCI indices is expected to rise after finance minister Arun Jaitley made the foreign direct investment (FDI) and foreign institutional investor (FII) limits fungible. With this, foreign investment limit in private banks would increase to 74 per cent. With the opening up of investment limits, analysts expect private banks such as YES Bank and Axis Bank to be included in the MSCI indices, too, which will push up India's weight on the MSCI Index to 8.4 per cent from the current 7.6 per cent.

Jyotivardhan Jaipuria, head of research at Bank of America Merrill Lynch, says: “With the budget indicating the FII and FDI caps would be made fungible, we expect banks like Axis, YES Bank, IndusInd and Kotak to be included in the MSCI again. This will raise the MSCI weight of India from 7.6 per cent to 8.4 per cent, reducing the overweight.”

Currently, FIIs own 56 per cent of MSCI India stocks, which are available to them for investment after regulatory caps. Foreign investors have been crowding Indian equities for a while, pushing up overweight positions. The overweight position of foreign investors (compared to the MSCI India) hit an all-time high of 400 basis points in the December 2014 quarter. Listed India-focused funds saw record inflows of $1.7 billion in January, while most other emerging markets saw redemptions to the tune of $3 billion.

FIIs continue to be overweight on Indian equities, by a record 400 basis points compared to the MSCI benchmark (emerging market).

However, this was also becoming a source of concern to some as the market was getting into over bought territory. However, with India's weight on the MSCI indices increasing, the overweight position, too, will come down as a result.