How China in MSCI index impacts India

The inclusion of mainland China A Large Cap stocks to the MSCI emerging market index has recently sparked some concern among Indian investors. They felt it would lead to foreign investors pulling out money from the local market.ET looks at the significance of the inclusion:

What is the MSCI EM index?
The Morgan Stanley Capital International (MSCI) index captures large and midcap stocks across 23 emerging markets (EM), like Brazil, Chile, India, Colombia, Russia, South Africa and China and tracks $2 trillion worth of assets globally.

The index serves as a representation of each country's market as it covers up to 85 per cent of the free-float adjusted market capitalisation. It is closely tracked by global investors and a country's inclusion in the index can attract foreign money into it.

Was China not already a part of the index? What has changed?
Mainland China's shares until this move were not a part of the index. Investors could only access shares traded in non-mainland regions like Hong Kong and Macau.MSCI, after four years of discussions, decided to include mainland China shares gradually in the index. The initial weight of China A shares in the index will be 0.73 per cent, comprising 222 stocks. The inclusion will be done in a two-step process in May and August of 2018.

What does this mean for India?
A lot of global funds invest based on the kind of weights assigned to countries in the MSCI ex. It was feared that China A EM Index. It was feared that China A shares' inclusion would significantly reduce India's weight in the index.However India's weight will be reduced by only slightly, to 8.85 per cent from 8.92 per cent. This is not expected to have any major impact in terms of fund outflows. Experts feel the outflow amount would be limited to around Rs 1,300-1,900 crore.

What are the future implications?
MSCI has indicated that it could add more China A shares to the index in the future if the country makes it easier for foreign investors to trade in its market. Though it will happen gradually, more and more money could flow out of India and into China as a result.