Moneycontrol Pro Panorama | MSCI who? Indian markets shrug off weight gain

The MSCI India index has surged by 84 percent while the MSCI China index has plunged nearly 50 percent.

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A few years ago, any announcement by MSCI to increase India's weight in the Emerging Market (EM) Index would have sparked a rally in Indian markets. Today, such announcements barely register a ripple. Recently, reports emerged that MSCI is considering raising India's weight in the EM index to over 20 percent for the first time, potentially bringing in an additional $3 billion (around Rs 25,000 crore). Yet, the news has gone largely unnoticed.

The reason for this indifference is clear: India's markets have grown increasingly self-reliant. Systematic Investment Plan (SIP) collections now exceed Rs 23,000 crore every month. When combined with investments in other funds and direct equity investments by domestic investors, the influx of $3 billion from an MSCI recalibration hardly seems significant. LIC's recent announcement that it plans to invest Rs 1.30 lakh crore—over five times what MSCI's re-rating could bring in a year—underscores this shift.

Indian markets' dependence on foreign investors has diminished, thanks to the burgeoning base of domestic investors. Foreign investor holdings in the Indian market are at a 12-year low, and the gap between their holdings and those of domestic funds is narrowing. If current trends continue, domestic funds may soon surpass foreign portfolio investors (FPIs) in market dominance.

Despite this, India's MSCI EM weight increase remains sentimentally significant. Following the latest review, India's gap with the current EM leader, China, is less than 400 basis points. Since 2021, the MSCI India index has surged by 84 percent while the MSCI China index has plunged nearly 50 percent.

This shift is partly due to efforts by the Indian government and SEBI to make Indian markets more attractive to foreign investors. SEBI's relaxation of foreign ownership limits has enhanced the appeal of Indian markets to international investors. This has led to a significant increase in the number of Indian companies in the MSCI India index—from 64 in 2014 to over 150 today. Meanwhile, in recent updates, China has seen 60 companies removed from the index.

While the changes in MSCI Index weightings may not significantly impact Indian markets, they will continue to make headlines. India's growing domestic investor base is now the primary driver of its market dynamics, reducing the influence of foreign investment flows.

Nonetheless, India's increasing presence in global indices like MSCI reflects its rising stature on the global economic stage.

Our Chart of the Day highlights how MSCI, thanks to additions of new companies in the list, has managed to outperform Nifty50.

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Shishir Asthana
Moneycontrol Pro