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140 Economic Survey 2021-22

Box 5: MSCI Emerging Markets Index and India’s weight

A key aspect of Foreign Portfolio Investments (FPI) are global indices such as MSCI with over US$ 16.3
trillion (equity) assets benchmarked against them (as of June 30, 2021). One of the most popular MSCI
indices is the MSCI Emerging Market (EM) index which tracks equity performance capturing large and
mid-cap companies across 25 emerging market countries including India. Launched in 2001, the MSCI
EM index today covers 1420 listed entities across emerging market economies. Companies must satisfy
certain minimum criteria relating to full market capitalisation, free-float market capitalisation, stock
liquidity and foreign inclusion factor, among others to be included in the index. 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 (Figure 5A).

In June 2017, MSCI had announced that beginning June 2018, China A-shares would be
4
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.
Later on, 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,
India’s Foreign Ownership Limits (FOL) in its Global indices increased effective December 1,
5
2020. Resultantly, MSCI India’s Foreign Inclusion Factor (FIF) rose by 7 per cent from 0.39 to 0.42.
6
Accordingly, India’s 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 US$ 2,379 billion are a part of MSCI EM index(Figure 5B).

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 Rs. 2.74 lakh crore into the Indian
equity markets.

Figure 5A: India weight at MSCI EM Index

Source: RIMES, MSCI, Morgan Stanley Research

4 A shares represent publicly listed Mainland Chinese companies that trade on either Shanghai stock exchange or Shenzen stock exchange.
5 The extent to which foreign investors can invest in a listed security of a country. An increase in FPI limits, increases the room available for
foreign investment.
6 Foreign inclusion factor of a security is defined as the proportion of shares outstanding that are deemed to be available for purchase in the
public equity markets by international investors.