India rises to second spot in key emerging market index, to get boost as investment destination

India is now ranked second after China on the MSCI EM index, with its weight having overtaken Taiwan. This confirms India’s status as one of the emerging countries’ most potential investment options.

The MSCI Emerging Markets index for India surged from 7 per cent to 17.1 per cent in just eight years.

According to a recent Nuvama research, India might achieve a 20 per cent weight in the MSCI EM Index by early 2024 with the continuous domestic institutional investments and possible sustained FII involvement.

In the medium run, India is expected to draw more foreign investments in 2024, according to recent Jefferies notes. India’s expanding growth is making its markets more important for global funds, although its presence in EM portfolios is still relatively small.

Higher foreign flows are likely due to favourable factors such anticipated political stability, a strengthening investment cycle, and a peaking US currency.

FPI flows have reverted following a notable $33 billion outflow from 2H21–2H22, with the largest inflows seen in the previous 11 years. These growing flows have been facilitated by India’s increasing weight in EMs; during the last six quarters, its neutral weight in the benchmark MSCI EM has climbed by 3.5 percentage points.

Analysis, however, reveals that rather from being noticeably above average, India’s relative position in big EM active funds is now closer to neutral. Consequently, the possibility that FPIs would take a bigger stake may end up being a major factor in future flows, according to the Jefferies note.

Up until October 2020, India’s MSCI EM pack share remained constant at 8 per cent; after that, it substantially doubled. The implementation of a standardised Foreign Ownership Limit (FOL) by India in 2020, strong performance in Indian stocks (particularly in the Midcap class), and poorer performance in other developing market countries, most notably China, were some of the causes that drove this spike.

India’s stock count rose to 131 in the MSCI Standard index by 2023, with a net addition of 17 Indian stocks over the course of four reviews. This is an improvement from the inclusion of just nine Indian firms in 2022.

India’s significant market rebound in comparison to other developing markets and MSCI’s switch from semi-annual to quarterly rebalancing are two factors driving this increase in 2023.

In the MSCI EM index, China’s weight dropped from 33.5 per cent to 26.6 per cent a year ago, while Taiwan, South Korea, and Brazil had little increases over the same period.

The biggest multi-family office in India, Client Associates (CA), is an advocate for more representation of India in the MSCI All Countries World Index (MSCI ACWI) and MSCI Emerging Market Index (MSCI EM). In the end of the decade, India’s economy is predicted to develop to become the third biggest in the world, a fact that is highlighted in the white paper.

It highlights the discrepancy between India’s potential and actual MSCI representation and calls for a reevaluation of the country’s place in global indexes.

The white paper examines India’s market capitalization and GDP in comparison to MSCI EM and MSCI ACWI allocation. It emphasises how diverse and higher risk-adjusted returns India may provide. It names India’s limited market accessibility and strong promoter ownership as the main causes of the country’s underrepresentation in MSCI indexes. Foreign investment in major enterprises is restricted by these factors.