Russian stocks' removal from global indices to divert FPI flows into India

Analysts predict between $600 mn-$2.4 bn of inflows into domestic stocks

The West is trying to attack Russia financially following its invasion of Ukraine. There are no sanctions yet that impose investment restrictions in Russian stocks. However, global index providers MSCI and FTSE are maintaining a tight vigil and mooting removal of Russia from their indices.

Such a move will lead to billions of dollars of outflows from Russia. Meanwhile, some portion of the outflows could get into other emerging markets (EMs), including India. This is because India’s weightage in the MSCI EM and other widely-tracked indices will edge higher if Russia is removed.

Late Monday, MSCI sought fund managers’ feedback on “the current level of accessibility and investability of the Russian equity market for international institutional investors.”

The index provider said it is “closely monitoring” the accessibility and investability of the Russian equity market.

Russia has been slapped with financial sanctions such as the exclusion of Russian banks from the SWIFT system.

Factors that impede stock investments into the Russian markets include deterioration in the convertibility of the Ruble into foreign currencies, closure of Moscow stock exchange and curbs on sale of securities.

“In view of these developments, MSCI seeks feedback from market participants on the appropriate treatment of the Russian equity market within MSCI indexes up to and including the potential reclassification of the MSCI Russia Indexes from Emerging Markets to Standalone Markets status,” MSCI said in a note inviting public feedback.

Analysts tracking composition of indices said they are closely watching the situation.

“If Russia is deleted from the MSCI Standard and Small Cap indices, passive trackers will need to sell around $15.74 billion of stock across all names. The flow is based on the close from 23 February - the current flow will be around 30% lower,” said analyst Brian Freitas, who publishes on Smartkarma in a note last week.

On February 25, Russia's MSCI EM stood at 2.66 per cent, eighth highest. China and Taiwan top the list with weightage 29.55 per cent and 15.86 per cent. Meanwhile, India has third weightage at 12.25 per cent.

Last week, FTSE too had issued a note highlighting concerns around Russia.

Last week, Sriram Velayudhan, vice-president – alternative research, IIFL-Institutional Equities said in a note, “in an event where an extreme measure like exclusion of Russia happens, MSCI India will stand to gain as the event can translate into potential inflows of USD 1.7bn (40 basis points (bps) increase in weight up) into the region. If FTSE global equity indices too decide to act on similar lines, it can translate to further inflows of $0.7 billion.”

To be sure, the sharp fall in the Russian markets have led to further reduction in its weight in global indices. This would mean lower inflows into India and other EMs compared to last week’s predictions.

“If Russian stocks are removed then India could be getting about 25 bps of inflow which equates to a total inflow of $600 million. Considering current EMs market-caps. The flow will be divided among all the Index members and the top 10 names which will benefit the most,” said Abhilash Pagaria, Head - Alternative & Quantitative Research - Research, Edelweiss Securities.

He said any inflows into India on account of Russia’s deletion will go into large liquid names like Reliance Industries, Infosys, HDFC and ICICI Bank.