India Becomes Top Weight in MSCI EM Index, Surpassing China

India has overtaken China to become the largest weight in the MSCI Emerging Market (EM) Investable Market Index (IMI) for the first time. As of September 4, Indian equities now hold a 22.27% weighting in the index, surpassing China, which has dropped to 21.58%. This shift is notable despite China’s larger market capitalization of $8.14 trillion compared to India’s $5.03 trillion, as reported.

Why India is Winning the Index Game

The change is largely driven by the inclusion of small-cap stocks in the MSCI EM IMI, where India holds a stronger position. In contrast, MSCI has been steadily reducing the weight of Chinese stocks due to ongoing economic challenges and regulatory pressures. Over the past two years, China’s weight in the index has fallen dramatically, while Indian equities have grown in prominence. In fact, India’s weight in the broader MSCI Emerging Markets Index is also on the rise, now only 320 basis points behind China, a sharp contrast to the 2021 gap of 29.5%.

Brokerage houses & Analysts have talked about how this rebalancing could lead to an influx of foreign capital into Indian companies. However, domestic investors currently dominate, often outbidding foreign participants. The brokerage suggests that increasing the equity issuance pipeline will help boost foreign participation in the future.

What’s Next for India’s Market Surge?

India’s new position in the MSCI EM Index is expected to attract major foreign flows, particularly as global funds adjust their portfolios to account for India’s nearly 2% weight in the global index. Although rising valuations of Indian equities remain a concern, brokerage houses view the current bull run in Indian markets as still being in its middle stages. Any market correction is predicted to be shallow, with the potential for sidelined funds to enter the market.

Conclusion: All in all, India’s climb to the top weight in the MSCI EM Index marks a milestone, reflecting broader market trends. With the country positioned as a top pick in emerging markets, its growth trajectory remains strong, although potential market corrections could offer opportunities for further foreign investment.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.