Investors' new-found love for domestic equities and government's policies are helping India get a stronger position in global stock indices, which is creating a virtuous cycle that ultimately ropes in more capital.

According to data published in the latest Economic Survey, India's country weight in MSCI Emerging Markets (EM) benchmark – which is the heart of multiple global strategies – has grown from 8.3 per cent in August 2020 to 12.45 per cent in December 2021, marking the biggest rise in individual nation influence in this period.

Even as India's weight in MSCI EM index grew by over 400 basis points (bps), rival China's fell by 1,000 bps from 42.5 per cent to 32.41 per cent. In this period, South Korea's weight marginally increased from 12.5 per cent to 12.81 per cent, Brazil slipped from 4.8 per cent to 3.99 per cent and South Africa's influence dropped from 3.5 per cent to 3.17 per cent.

Key factors

A key factor driving foreign portfolio investments (FPI) are global indices such as MSCI with over $16.3 trillion (equity) assets benchmarked against them (June 30, 2021). MSCI EM index, which tracks equity performance capturing large and mid-cap companies across 25 emerging market countries including India, today covers 1,420 listed entities across emerging market economies.

"Many global institutional investors use MSCI's EM Index and several such indices covering other markets and themes as part of their passive investment strategy allocating capital in line with the benchmark indices. India's weight in the MSCI EM Index plays an important role in attracting FPI investments in its equity market," says the Survey.

In June 2017, MSCI had announced that beginning June 2018, China A-shares would be included in MSCI -EM index in a phased manner. This meant a gradual reduction in weights of all other countries.

Consequently, India’s weight in MSCI EM index reduced from 9.32 per cent in August 2018 to 8.3 per cent in August 2020. But, tweaks by Indian government helped. The government relaxed the FPI limit for Indian companies to the applicable foreign direct investment (FDI) sectoral limit (which is higher) with effect from April 1, 2020. Consequently,

Foreign ownership limits

India's foreign ownership limits (FOL) in its global indices increased effective December 1, 2020. Accordingly, India weight in MSCI EM index immediately increased to 9.2 per cent from 8 per cent.

"Remarkably, the increase in FPI limit to the sectoral cap has acted as a catalyst for increasing weightage of Indian securities in other major equity indices as well such as MSCI APxJ (100 bps), MSCI AC World Index (16bps). As of December 2021, India’s weight in the MSCI EM index is 12.45 per cent and 106 listed Indian entities having AUM of $2,379 billion are a part of MSCI EM index," the Survey added.

The virtuous cycle created by higher India weight is stronger foreign inflows. The foreign interest in Indian capital markets has gone up as reflected in the large inflows. As per data available from NSDL, 2020-21 witnessed FPI inflows of over ₹2.74-lakh crore into the Indian equity markets.

Do note that its not just foreigners who are gung-ho on Indian stocks. With continuing buoyant trend in Indian stock markets, participation by local individual investors in equity cash segment has increased and the share of individual investors in total turnover at NSE increased from 38.8 per cent in 2019-20 to 44.7 per cent in April-October 2021.

The substantial increase in share of individual investors in 2020-21 and 2021-22 can partly be ascribed to the increase in new investor registrations witnessed since February 2020. For instance, in April-November 2021, nearly 221 lakh individual demat accounts, which enable equity investing amongst others, were added.

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