What MSCI’s index tweaks mean for India

What is the MSCI index?

MSCI or Morgan Stanley Capital International is known for its stock indices. MSCI tracks the performance of stocks and acts as a base for exchange traded funds. One of its top indices is the MSCI All Country World Index (ACWI), which tracks stocks from 23 developed and 24 emerging markets. Fund managers use the MSCI ACWI as a guide for asset allocation and as a benchmark of performance of global equity funds. MSCI Emerging Markets Index tracks companies from 24 emerging economies and is used to track economic performance of emerging market companies.

How are stocks picked for its equity indices?

The MSCI indices are market capitalization-weighted indices. Stocks selected for its equity indices are the ones which are easily traded and have high liquidity. The highest weightage on the index is given to the stock with the largest market capitalization. MSCI indices are calculated daily. The MSCI Index India evaluates the performance of large and mid-cap segments of the Indian market. With 113 constituents, the index covers approximately 85% of the Indian equity universe. In this index, the financial sector has the highest weight of 24.74% followed by IT at 15.72% and Energy at 12.04%.

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How does MSCI influence US portfolio investment?

MSCI indices are tracked closely by global investors looking to allocate funds based on the weightage assigned to stocks. A lower weightage for a stock can lead to foreign portfolio investors (FPI) ending up net sellers. It’s a sort of investment advisory for or against specific shares. In a way, it acts as an external factor, besides the equity research inputs of merchant bankers.

How did MSCI move on Adani shares?

In its February 2023 Index review, MSCI reduced the weightage of four Adani group companies after their market capitalization declined. It later postponed the decision to reduce the weightage of two of these stocks to its May 2023 index review. Had the global index moved as per the initial plan, it definitely would have led to FPIs unloading Adani shares. This could have resulted in further negative sentiments possibly spreading to the market in general—as perception tends to largely influence capital markets.

Any takeaways for market regulators?

It is important for regulators to understand that institutional investors are not influenced by the wisdom of only equity research. External factors influence them, too. The Hindenburg report is a case in point. Regulators need to be cautious as the attitude of institutional investors could ultimately impact other fundamentals like the rate of exchange, current account deficit and cost-push inflation, affecting the country’s growth story.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH