India's weighting in widely-tracked MSCI EM index set for major boost

MSCI acknowledges govt's move to relax FPI investment limits

India’s weighting in global indices such as the MSCI Emerging Markets (EM) index — estimated to be tracked by funds with assets under management of $1.8 trillion — is set for a boost. MSCI has said it will increase the so-called foreign inclusion factor (FIF) for several Indian stocks with effect from December 1, and the finer details will be decided next month at its semi-annual review.

Many expect FTSE Russell, another major global index provider, to increase India’s weighting in its index.

Analysts at Motilal Oswal said MSCI’s decision would result in $3.5 billion of flows into the country, while Morgan Stanley analysts pegged passive inflows at $2.5 billion because of the move.

The US-based brokerage expects India’s weighting in the widely-tracked MSCI EM index to go up from 8.1 per cent to 8.8 per cent, and new stocks such as Kotak Mahindra Bank to be added to the index, thanks to an increased legroom for overseas investors.

“Ceterus paribas, MSCI India’s weighting in MSCI EM will increase to 8.7 per cent (weighting increases for current constituents) and 8.8 per cent (new additions) from the current level of 8.1 per cent, and passive inflows of $1.93 billion and $600 million, respectively,” said Sheela Rathi and Ridham Desai, analysts at Morgan Stanley, in a note. 

They expect Kotak Bank’s weighting in the index to be 1.6 per cent, resulting in $502 million of inflows. Shares of the private sector lender jumped 12.2 per cent — most since March 25 — on Tuesday. Shares of Asian Paints and Bajaj Finance, seen as other big beneficiaries, too, jumped 5 per cent each.

MSCI’s decision to increase FIF for Indian stocks comes after the Centre’s decision to automatically treat the sectoral limit as the foreign portfolio investor (FPI) limit, thereby freeing up investment limits for overseas investors. Several companies have capped their FPI investment limits at levels much below the permissible limits for the sectors they operate in. While this change has come into effect from April 1, MSCI and other index providers had put off their decision to increase India’s weighting citing lack of clarity around the new norms.

Sources said Indian authorities and depository firms National Securities Depository (NSDL) and Central Depository Services (CDSL) took steps to address the concerns raised by the index providers.

“MSCI welcomes the recent disclosure of the foreign investment limits for Indian securities by NSDL and CDSL addressing the concerns on the timeliness, quality and standardisation of the data,” said MSCI in a release. The foreign inflow boost couldn’t have come at a better time for India. “Given the US elections and rising Covid-19 infections, FPIs are turning risk-averse. The MSCI action will help mitigate any potential outflows from the domestic market in the near term,” said an analyst.