India becomes largest weight in MSCI EM IMI, overtaking China

India remains Morgan Stanley's top preference in the EM context, and its number 2 choice in the Asia-Pacific context.

India has overtaken China in the MSCI EM Investable Market Index (IMI) on September 4 to become the largest weight, and is now nearing the threshold to surpass China as the top weight in the broader MSCI Emerging Markets index as well.

The MSCI Emerging Markets Investable Market Index (IMI) includes large, mid and small-cap counters from 24 Emerging Markets economies.

International brokerage Morgan Stanley in a note has explored if this is good or bad news for Indian equities. Currently, foreign investors are being outbid for the same equity by domestic market participants. Hence, the growing issuance pipeline is important to increase foreign participants, the note observed.

The rising index weight could be a sign of exuberance, the Morgan Stanley note explores, and alternatively, it could also be due to fundamental factors such as improving free-float and rising relative earnings of India Inc.

"Fundamental factors definitely apply to India and, to that extent, India's new found position in EM is not a worry," the brokerage note said. India remains Morgan Stanley's top preference in the EM region, and its number 2 choice in the Asia-Pacific geography.

Any correction could drive all the money waiting on the sidelines into the markets, therefore, making any such pullback relatively shallow, the note said.

The brokerage also noted that there are several potential triggers for a market correction, but it doesn't view them as significant enough to derail the ongoing bull run in Indian equities. For the brokerage firm, the bull run has only crossed the halfway mark, it said.

A bull market peak could possibly still be in the future, the note added, and India's weight in the EM index could have some more distance to travel before it peaks.