Market rally may get additional $2.5 billion fuel

Increase in India’s weight in MSCI EM index could spur more inflows as funds mirror the index

December 17, 2019 10:07 pm | Updated 11:36 pm IST - MUMBAI

The coming months could see incremental foreign flows amounting to around $2.5 billion in Indian equities as the country’s weightage increases in the MSCI Emerging Markets (EM) index on account of the increase in foreign investment limit in listed entities.

Last week, the government confirmed its move to implement its Budget announcement relating to increasing the statutory limit for foreign portfolio investors (FPIs) in a company from 24% to the sectoral foreign investment limit with effect from April 1, 2020.

According to Morgan Stanley, it would lead to India’s weightage going up by 70 basis points in the MSCI EM index, translating to about $2.5 billion of additional flows from foreign investors. “This implementation will lead to MSCI India’s weight in MSCI EM to rise. Using the current list of constituents, we expect MSCI India’s weight to rise by about 70bps (basis points) in the semi-annual index review of May 2020, implying passive flows of $2.5 billion,” stated a report by Morgan Stanley.

According to the global financial major, stocks like Larsen & Toubro (L&T), Asian Paints, Bajaj Finserv, Bajaj Finance, Britannia Industries, Tata Steel, Nestle India and Bharti Infratel, among others, would see the maximum increase in their weightage.

“The announcements, in our view, have far-reaching effects on India’s free float, its weight in the MSCI indices, foreign flows, and supply of equity.

India’s free float market cap rank has been lower compared to its market cap and GDP rank because of high promoter holdings and low foreign investment limits.

“This has constrained active and passive allocation to India from abroad,” it added. An increase in the weightage in MSCI index leads to enhanced flows as many funds mirror the index in their portfolio and if the weightage of a particular stock goes up, then these funds also increase their allocation in the same proportion.

Lowering FPI limit

Incidentally, while the government has given the option to companies to lower their FPI limit by March 31, 2020 through a board approval and a special resolution passed by the shareholders, such entities can always increase the limit at a later date after which it cannot be reduced again.

Thus, unless companies pass board and shareholder resolutions, all companies in India will irreversibly have their FPI limit at the sector limit after March 31, 2020, stated the report.

Overseas investors have been quite bullish on Indian equities in the recent past with the cumulative flows pegged at over ₹93,000 crore during the current calendar year.

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