India's MSCI EM weight set to rise with inclusion of three stocks in index

India's weightage in the MSCI EM index is set to rise thanks to the possibility of addition of as much as three domestic stocks in the index. In a note on Tuesday, Morgan Stanley said SBI Life Insurance, ICICI Prudential Life and Siemens India are key inclusion candidates in the upcoming review. Also, the weightage of ICICI Bank is set to increase as the legroom for foreign portfolio investor (FPI) investment in the stock has gone up.

All these changes get implemented, India's weight in MSCI EM could rise by 37 basis points (bps) from the current level of 8.89 per cent, says Morgan Stanley. Also, passive inflows of more than $1.5 billion could come into India on account of these changes. MSCI EM is tracked by funds with assets of over $400 billion.

Morgan Stanley says the possibilities of ICICI Pru Life and SBI Life getting including in the index is high as the stock meets the large cap market cap stock criteria of MSCI. Also, the recent share sales in the stock means it also meets the free float market cap criteria. Similarly, ICICI Bank’s weight is set for increase thanks to the fall in foreign ownership from 56.8 per cent to 54 per cent.

Meanwhile, India bulls Housing Finance and Glenmark Pharmaceuticals are the two stocks that could get excluded from the MSCI EM index as their full and free-float market cap has fallen below the threshold set by MSCI. However, the outflows on account of these two exclusions could be a little over $100 million, forecasts Morgan Stanley.

Global index provider MSCI is due to announce its semiannual index review on November 8 and the changes will take effect from November 27.

During the previous reviews, India’s weight in the MSCI EM index was pruned to provide for a higher weightage to so-called China-A shares (shares listed in mainland China).

Over the medium term, Morgan Stanley believes India’s weight could increase further if the government goes ahead with some of the proposed policy changes.

“The proposed Finance Minister's announcement to increase the minimum statutory limit for FPI investment in a company be increased from 24 per cent to the foreign investment limit of the sectors, has the potential to increase India's weight in MSCI EM by 81bps. We await a press note or circular from the government confirming these changes,” the brokerage said in a note.