India overtook China in its weightage in Morgan Stanley’s Emerging Markets Investable Market Index (MSCI EM IMI) on Deptember 4 (Wednesday).

India’s share in the index now stands at 22.27 per cent, compared to China’s 21.58 per cent.

What is the MSCI EM IMI?

The MSCI EM IMI, which consists of 3,355 stocks, covers large, mid, and small-cap companies from 24 emerging markets. It aims to represent about 85 per cent of the free-float adjusted market capitalisation in each country.

While the main MSCI EM Index includes large and mid-cap stocks, the broader IMI index extends its coverage to small-cap companies as well, giving India an edge due to its higher small-cap weighting.

Behind the India-China shift

The rebalancing points to a larger market trends. Chinese markets have faced economic challenges, while India’s economy has enjoyed favorable macroeconomic conditions, contributing to superior equity market performance.

The gains in India’s equity markets have been broad-based, with strong contributions from large, mid, and small-cap stocks.

Analysts attribute this positive momentum to factors such as a 47 per cent rise in foreign direct investment (FDI) in early 2024, declining Brent crude prices, and substantial foreign portfolio investment (FPI) in Indian debt markets.

As a result, MSCI has been increasing India’s relative weight in its indices, including the MSCI EM Index, where India’s share rose from 18 per cent to 20 per cent between March and August 2024. Meanwhile, China’s share has slipped from 25.1 per cent to 24.5 per cent during the same period.

Expected impact for India

The increase in India’s weight in global emerging market indices is seen as a positive development, as it shows the growing importance of Indian markets and highlights the need for both domestic and foreign capital to fuel the country’s economic growth.

Following this rebalancing, Indian equities are expected to attract inflows of around $4 to $4.5 billion, according to analysts.

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Here’s how India’s share leapt ahead of China’s in Morgan Stanley’s key Emerging Markets index