MSCI India Index: How does it affect Indian stock market?
What is MSCI India Index?
Morgan Stanley Capital International (MSCI) has set up several global indices while one of these is a composite of Indian stocks i.e. MSCI India Index. It consists of many reputed Indian companies across sectors such as IT, finance, and energy. These companies account for at least 85 per cent of the total equity offered by Indian companies. There are 101 companies listed on MSCI India Index as of June 2021.
Companies on MSCI India Index are weighted just like they are on Sensex. Every stock on the index has a particular weightage, which depends upon several parameters, namely, dividend, total turnover, and market capitalisation. Higher market capitalisation translates to a higher weightage allotted to it on the index. Therefore, MSCI India Index comprises some of the biggest names in India. It is reviewed four times a year i.e. in February, May, August, and November.
Why is it important?
Foreign institutional investors (FIIs) continue to be one of the most significant drivers of the Indian equity market. No denying the fact that FIIs, especially the long-only funds have found India to be one of the most attractive markets since early 2000. Foreign investors need information about the stability and volatility in the prices of shares in the Indian capital market, and they turn to MSCI indices, which act as solid indicators of the soundness of the Indian market.
The greater the weightage of a particular company on the index, the higher will be the total amount of foreign investment into the stocks. If a weightage of a company is reduced, then there is always a possibility of foreign investors withdrawing their funds. In simple words, the amount of funds that a foreigner will invest in an Indian share is more often than not directly dependent on the stock weightage on MSCI Index.
Many investors prefer to follow a benchmark investing strategy or a passive investing strategy. They invest their money into an index in proportion to the weight on that index. Suppose an investor has Rs 1 crore, they will divide this amount and invest in a single stock depending upon the weightage that it has on the index. So, if a stock has a 10 per cent weightage on the index, then they will invest 10 per cent of Rs 1 crore, or Rs 10 lakh in the stock. Each time, the index components are re-formed or the weights are changed, the foreign investors, who passively invest in MSCI India Index, have to re-adjust the portion of their investment in the individual shares as well.
Recent changes in MSCI Index
MSCI in its May semi-annual review added six stocks and removed one stock. The additions to the index included Adani Enterprises, Adani Total Gas, Adani Transmission, Bharat Electronics, Cholamandalam Investment, and SBI Cards & Payments. On the other hand, Zee Entertainment Enterprises has been deleted from MSCI India Index. These changes were made at the close of May 27, 2021.
According to estimates, the inclusion of Adani Enterprises could fetch US$318 million, Adani Total Gas - US$310 million, Adani Transmission - US$285 million, Bharat Electronics - US$149 million, Cholamandalam Investment - US$196 million, and SBI Cards & Payments - US$237 million. On the other hand, the removal of Zee Entertainment Enterprises may result in the outflow of US$140 million in FII money.
Bottom line
MSCI rejig is another factor that has spurred the ongoing bull market. An increase in the company’s weight in MSCI Index can result in large capital inflows, which will pour in automatically, once the index’s weight changes.
In anticipation of higher inflows into certain stocks, many investors buy such stocks in the hope of making big bucks. However, as these stocks are tempting, one must be careful while investing in such stocks. At the end of the day, unless the company fundamentals are strong, the capital inflow-driven stock price rally may not sustain.