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Overview:
Morgan Stanley Capital International (MSCI) is an investment research firm that investment data and analytics to investors. The firm is best known for its benchmark indexes like MSCI India Index, MSCI Emerging Markets Index among 1,60,000 indexes. (Yes, you read the number right! It’s too much.)
Much like Nifty & Sensex, MSCI Indexes are based on market capitalisation, which means stock weight is decided based upon its market capitalisation i.e. stock price multiplied by number of stocks outstanding. Every index in MSCI family is reviewed quarterly and rebalanced twice a year.
MSCI India Index:
Out of 1,60,000 different indexes, MSCI maintains one India index too. It is designed to measure the performance of the large and mid cap segments of the Indian market. With 86 constituents, the index covers approximately 85% of the Indian equity universe. It takes into account how much dividend the company has paying to its investors, company’s current turnover and foreign ownership limit (FOL) along with usual market capitalisation.
The index is reviewed quarterly in February, May, August and November. During the May and November semi-annual index reviews, the index is rebalanced during which new stock addition/deletion as well as change in weights of current stock take place.
Why it is important?
MSCI India index is widely tracked index for Indian stocks overseas and acts as an indicator of the soundness of the Indian capital market. Many foreign investors follow benchmark indexes like MSCI India index for their stock investment. It’s also called as passive investing, because foreign investors don’t research for any Indian stock on their own and just blindly follow MSCI India index. In simple words, the amount of funds that a foreigner will invest in an Indian share will be directly dependent on the stock’s weightage on the MSCI index. There are many international index mutual funds who also use this index for passive investment.
Why MSCI India index making waves these days?
In April 2020, Government of India decided to automatically treat the sectoral limit as FOL for particular stock. Suppose, if company A’s FOL or FII investment limit is 49%, but the business sector in which company operates has FOL of 75%, then the new FOL of the company will be 75%. But particular company’s board has power to restrict FOL lower than the sector’s FII limit. Though this change happened in April, MSCI didn’t alter the India index in its May & August quarterly reviews.
But now in November 2020, MSCI will implement those changes in its India index in semi-annual index review and expects a foreign inflow of $2.5 billion over this development. This will also increase MSCI India index’s weight in MSCI Emerging Markets Index from current 8.1% to 8.7%. Index’s weight in another index, sounds interesting!
Stocks that will get benefitted the most after rebalancing:
Current MSCI India index stocks that will get passive foreign inflows of more than $100 million include Asian Paints Ltd., Bajaj Finance Ltd., Britannia Industries Ltd., Larsen & Toubro Ltd. and Nestle India Ltd, according to Morgan Stanley.
Kotak Mahindra Bank, IPCA Laboratories, Adani Green, PI Industries and Apollo Hospitals may get added to MSCI India Index. All these stocks are rallying up and up over the news. Recently, Bharti Airtel share price was on roller-coaster, as NSDL initially said its FOL limit has been changed from 49% to 100%, but later again revised it to 49%.
So, let’s wait for results of MSCI’s semi-annual index review which will get announced on November 11, 2020.
Disclaimer: This information is only for educational purposes. Please consult your own financial advisor before investing.
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