India's weight in MSCI EM index declines to 2-year low at 16.21%

India's share in the MSCI EM index has fallen to 16.21% in August, its lowest since November 2023, slipping to third place behind Taiwan after a year of weak equity performance

India’s weight in the MSCI Emerging Markets (EM) index has dropped to its lowest in nearly two years, as the underperformance of domestic equities drags down its standing in the benchmark widely tracked by global investors.

 

At the end of August, India’s share stood at 16.21 per cent — the lowest since November 2023 — marking a steep fall from its July 2024 peak of 20 per cent, when it had come within 4.5 percentage points of China, the index heavyweight. India has also slipped one notch to third place, behind Taiwan.

 

A similar trend is evident in the MSCI EM Investable Market Index (IMI). After securing the top slot in August 2024, India has now slipped to third position, with its weight falling to 17.47 per cent from 22.3 per cent a year earlier.

 

The decline follows a year of relative underperformance. While the MSCI EM index has gained 16 per cent in the past 12 months, India’s benchmark Nifty50 has declined 2 per cent.

 

According to Abhilash Pagaria, head of alternative & quantitative research at Nuvama Institutional Equities, the decline has come despite India’s rising representation in the MSCI EM index — from 146 companies in July 2024 to 160 at present.

 

“The drop was largely due to China’s sharp rally, which boosted its free-float market cap, even as Indian heavyweights remained sideways or underperformed,” he said. 

 

Pagaria expects India’s weight to recover gradually, with representation likely rising to around 170 companies over the next year. “However, without a meaningful correction in China, India crossing the 20 per cent share may take longer,” he added.

 

Lower weighting in the MSCI EM index typically translates into reduced flows into India, as the index is tracked by global funds with assets of over $700 billion. Besides the fall in the weight, India has also fallen out of favour with active fund managers amid headwinds such as weak earnings delivery, growth slowdown, and heavy tariffs imposed by the US.

 

An analysis by Nomura of 45 large EM funds shows that relative allocations to India fell by 100 basis points (bps) month-on-month (M-o-M) in July, with 41 funds trimming exposure. This makes India the largest underweight (UW) market in EM portfolios, with allocations standing 2.9 percentage points below its MSCI EM weight.

 

Morgan Stanley, in a note, observed that India’s weight in global EM funds relative to its MSCI EM weight is among its weakest on record. The brokerage noted that India’s market has been derated compared to long bonds, EM peers, and gold, but added that a rerating could follow as valuations do not fully reflect improving macro fundamentals and an impending earnings recovery.

 

Despite its recent underperformance, India remains the most expensive market in the EM pack. The Nifty50 currently trades at 20 times estimated 12-month forward earnings, compared with less than 14x for China, 16.6x for Taiwan, and 13.3x for the MSCI EM index.

 

However, India’s valuation premium has cooled off with the premium to MSCI EM index now standing at 50 per cent, well below its historical average of 80 per cent.

 

HSBC, in a recent note, said the premium is justified by “valid reasons” such as high return on equities (ROEs), stronger long-term growth prospects, robust domestic equity demand, and lower perceived risk due to India’s regulatory and institutional framework. The brokerage, however, cautioned that any slowdown in economic growth or a structural decline in ROEs could undermine this advantage.