India’s weight in MSCI EM at record, but global uncertainties cap inflows

MUMBAI: India’s weightage in the MSCI Emerging Market Index hit an all-time high in August thanks to the rally in its stock benchmarks — Sensex and Nifty. The higher weightage, however, has not translated into fresh flows because of foreign investors’ lack of appetite for emerging market stocks.

Foreign money managers operating Emerging Market funds benchmark their performance to MSCI Emerging Market Index. So, when the weightage of one market in the index goes up, funds increase their shareholdings in that country in the same proportion. A large chunk of the foreign institutional flows into India has been through emerging market funds.

“All foreign investors want to be overweight on India in the long term, but there are issues in the short term like volatility in crude price, trade war, rupee’s fall and elections which could impact Indian markets,” said Bharat Iyer, head of India equity research at JP Morgan.


India’s weight in MSCI EM index increased by a record 76 basis points so far this year to 9.48% in August largely because of the sharp rally in Sensex and Nifty. The Sensex has gained 12% so far this year, emerging as the best performer among all global benchmark indices.

In March, India’s weight in MSCI EM index declined to 8.10% after the inclusion of China A-shares index that reduced the country’s influence on the index. Early this year, MSCI warned that it is considering placing some emerging markets including India on notice for limiting investor access.

Market watchers said foreigners are unlikely to align their holdings to India’s higher weight on the MSCI index any time soon.

“The FPI percentage of daily volumes has fallen sharply and it is unlikely to increase in the near term due to three key factors: political uncertainty ahead of elections, currency concerns and rich valuations, which are much higher than most peers,” said Sanjay Mookim, India equity strategist, Bank of America Merrill Lynch.

Last year, India’s weight in the MSCI EM went up by 47 bps to 8.72%, surpassing the previous high during the 2007 bull run. The extent of India’s overweight in the EM portfolios versus the MSCI EM benchmark was 450 basis points in 2014.

India’s Weight in MSCI EM at Record

Now, this overweight has been reduced to 60-70 basis points due to several reasons including expensive valuations, according to analysts.

India’s position in emerging market portfolios declined to a seven-year low currently due to sharp outflows led by a drop in the rupee against the dollar.

Foreign portfolio investors have sold stocks worth ₹4,167 crore so far this year compared to₹51,335 crore investments (including primary and secondary market flows) in 2017. India is going to be one of the biggest beneficiaries if foreign investors decide to return to emerging markets, said brokers.