India gains heft in MSCI EM index 

India has toppled Taiwan to take the second place in the MSCI EM Index, with a weightage of 17.1 per cent. The country’s representation in the index is poised to top 20 per cent in the coming months, according to analysts, which could give a further fillip to overseas flows and cement the country’s place as an attractive investment destination among emerging markets.

India’s weightage in the MSCI EM index stood at 13 per cent in the beginning of last year, behind Taiwan (14.4 per cent) and China (33.5 per cent). The weightage had remained steady at around 8 per cent from 2015 to October 2020, implying a doubling in the last three years.

“The robust performance by Indian equities, particularly in the mid-cap segment, has led to numerous inclusions in every review. India’s move to a standardised Foreign Ownership Limit in 2020 and the relative underperformance by other EMs, especially China, has also helped India’s cause,” said Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research.

FPI, EM portfolios

Foreign portfolio investors pumped in a record $20.7 billion into Indian equities last year. Part of the higher flows are an outcome of India’s rising weightage in EMs; with its neutral weight in benchmark MSCI EM seeing a 3.5 percentage points increase over the past six quarters, according to analysts. The Nifty returned 20 per cent last year, outperforming MSCI EM by 11 percentage points in dollar terms.

“The sectoral limit available to FPIs across sectors has increased over the years. Companies have been passing resolutions to raise FPI limits. A lot of new issuances and divestment by promoters has increased the free float of Indian companies, all of which may have contributed to the increase in its weighting,” said UR Bhat, director, Alphaniti Fintech.

India’s relative positioning in EM portfolios still remains light. Jefferies’ analysis of large EM active funds, for instance, indicates that India’s relative positions are much closer to neutral now as opposed to an average overweight of more than 2 percentage points. As such, the headroom for FPIs to take a larger overweight position on Indian equities could become an important driver for flows.

“Rising size is making Indian markets much more relevant for global mandated funds. Structural positives such as the expected political stability, rising investment cycle providing multi-year growth visibility and peaking dollar present ideal conditions for higher foreign flows,” said a note by Jefferies.

A recent white paper by Client Associates, a private wealth management firm, says that India merits significantly higher representation in both the MSCI EM and MSCI ACWI indices, given the country’s growing economic importance, attractive risk-adjusted returns and diversification benefits for investors.

A lower free float and market accessibility are the two chief reasons for the current under-representation. “Promoters’ significant equity holdings in larger companies limit foreign ownership and reduce accessibility for passive investors. Despite ongoing policy efforts like increased FDI limits and a unified FPI regime, India continues to score low on accessibility criteria within the MSCI framework,” the wealth manager observed.

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