Foreign capital is vital for emerging markets like India as it provides essential funds for companies, and helps boost shareholder value. The scale and timing of this foreign money are key for domestic investors.
But while foreign investors can help the economy, they also bring market volatility, since such money is ‘easy come, easy go’, and affects inflation and local currency demand.
Recent rebalancing in major global indices, like the MSCI and FTSE, creates opportunities for increased foreign inflows. This edition of Chart of the Week focuses on changes in the Morgan Stanley Capital International (MSCI) indices, a global index provider traded on the NYSE.
India's increased weight in the MSCI Global Index could lead to inflows of up to $1.5 billion
MSCI's indices are critical benchmarks for global fund allocation, guiding investments in stock markets worldwide. These indices are closely monitored by global entities such as asset managers, hedge funds, banks, companies, and insurance firms. Foreign portfolio investors (FPIs) typically use MSCI indices to guide their allocation of passive funds and have already invested $14.64 billion in Indian equities this year.
Notable among the MSCI indices are the All Country World Index, Frontier Markets Index, and Emerging Markets (EM) Index (launched in 1988, India included in 1994). India's weight in MSCI indices is set to double to 16.3%, second only to China's 29.8%, in three years, after the latest rebalancing, which will take effect from November 30.
India’s benchmark indices have outperformed the EM index, yielding 4.7% returns in the year till October, compared to MSCI EM's -2.1% over the same period. Over 10 years, India's annualized returns stand at 8.3%, against MSCI EM's 1.1%.
Record number of Indian stocks in MSCI after latest rebalancing
Indian stocks’ weightage in MSCI indices set to rise with nine additions
The MSCI EM index determines stock weights based on free-float market capitalization, which are shares that foreign investors can trade. Greater market capitalization means more weight and allocation from investors. Reliance Industries (with a weight of 1.34%), ICICI Bank (0.91%), and Infosys at (0.87%) are among the top 10 stocks in the MSCI EM index.
In its latest quarterly update, MSCI added nine Indian stocks to the index. Key entries include Tata Motors, Polycab India, Macrotech Developers, IndusInd Bank, and One 97 Communications, the parent company of Paytm. Following this, IndusInd Bank, Suzlon Energy, Persistent Systems, and APL Apollo Tubes are expected to get large investments of $290 million, $264 million, $258 million, and $227 million, respectively, according to Nuvama Research. This brings the total Indian stocks in the index to 131. Notably, no existing Indian stocks were removed to include these new ones.
The latest positive review by MSCI EM comes almost a month after foreign brokerage Morgan Stanley upgraded India to the status of ‘most preferred’ emerging market.
Recent changes in FTSE set to bring additional inflows into Indian equities
Recently, FTSE, another global index provider, implemented adjustments in its semiannual index review on September 18, 2023. It added stocks like Reliance Industries, Wipro, and Bajaj Finance to the India index and expects to attract $120 million from just these three stocks. However, Infosys and HCL Tech might see outflows of $35 million and $15 million, respectively, as reported by IIFL Research.
The addition or removal of a stock from an index can influence its share price. When a stock is added, demand may increase, leading to a possible price hike. If removed, it could face selling pressure, decreasing its price. These changes, therefore, can impact individual investors' portfolio values.
The rise in inflows is expected to come from passive trackers like index-based exchange-traded funds (ETFs) and mutual funds, not necessarily from active fund managers. While this does not guarantee a rise in overall foreign funds, it boosts market sentiment.
