MSCI EM rejig: India’s weight loss could result in $700-m outflows

ET Intelligence Group: The weight of Indian equities may be trimmed by 28-33 basis points from 8.9 per cent in the MSCI Emerging Markets index, a benchmark for global fund managers to evaluate EM performance. This is due to increased weight of China ‘A’ shares, which represent companies from mainland China, and inclusion of stocks from Saudi Arabia and Argentina in the index.

The weight reduction may lead to fund outflows to the tune of $700 million. Since over 11 per cent of the foreign portfolio investors’ exposure to Indian equities originate from the passive funds (ETFs), weight change will impact fund flows. FPIs have total assets under management (AUMs) worth $421 billion in Indian equities at the end of April 2019, according to the data from NSDL. The AUM of ETFs was $40.07 billion in March 2019 compared with $34.6 billion six months ago.

The weight of China ‘A’ shares was increased following rising free float or the number of shares available for trading. This resulted in a jump in the foreign inclusion factor -- the proportion of shares that FPIs can hold in Chinese stocks, to 10 per cent from 5 per cent. Saudi Arabia and Argentina which were added for the first time in the MSCI EM index have been ascribed weights of 1.42 per cent and 0.26 per cent, respectively.

The possibility of lower weight of Indian equities in the index has cropped up at a time when funds are flowing out of emerging markets due to rising concerns from global tariff war.