Indian equities may attract $1.3 billion in passive flows

The Indian equity market is likely to attract $1.3 billion in passive flows as the country has moved into a new regime in which the FPI limit has been increased to the sector foreign limit, said Morgan Stanley in a note.

“Over the next few months, we expect MSCI to rebalance MSCI India weights to reflect this change along with removing the DR (depository receipts) in the FOL (foreign ownership limit) calculation,” said Morgan Stanley. The investment bank estimated MSCI India’s weight in emerging markets index to rise by 55 basis points and India’s foreign inclusion factor to rise to 0.42 from 0.39.

A little lower than a third of current constituents will see an increase in their stock weights whenever MSCI considers this particular rebalancing, said Morgan Stanley.


“In our estimates, this would imply passive inflows of $1.3 billion. The top five beneficiaries of this regime change are Larsen & Toubro, Asian Paints, Bajaj Finance, Nestle and Divi’s — these stocks could see the most increase in their stock weights in the index,” said Morgan Stanley. On a relative basis, large-cap stocks such as RIL, HDFC and Infosys are likely to see the most reduction in weights given the upward rebalancing of beneficiaries, said Morgan Stanley.

The financial services company said the change in foreign limits also creates an opportunity for more stocks to be included in the index. Kotak Mahindra Bank, Biocon and Indraprastha Gas are the top three stocks that could be inclusion candidates, it said. ITC and Bajaj Auto could see weight reductions due to removal of depository receipts.

National Securities Depository and Central Depository Services on Friday revised the foreign portfolio investor (FPI) limits for all listed stocks on Indian bourses. With this move, FPI limit in certain stocks has gone up to 100%. This comes in the wake of MSCI’s decision to defer changes to India’s weightage in its global indices, citing lack of implementation of the government decision to raise the statutory FPI limit in domestic companies from 24% to the respective sectoral foreign direct investment limits. MSCI had said on March 31 that it would wait for practical implementation of these changes and systematic publication of the new sectoral limits applicable to Indian stocks before making any change to the MSCI indices.