Foreign funds to withdraw $2-3 billion after the MSCI tweak

India’s weight in the MSCI Emerging Market Index is likely to fall by a percentage point in the next year, by causing an expected outflow of $2-3 billion investment by the passive funds.
The events which can affect India’s weight in the index includes an increase in the representation of Chinese mainland shares, the addition of Argentina and Saudi Arabia, which is a modification in the calculation methodology for foreign ownership limits and erosion in the market value of Indian stocks.
The Global index provider MSCI announced that they would quadruple the weightage of Chinese mainland shares in the MSCI. India’s weightage will come down by 32 basis points or 0.32% points, resulting in the outflow of nearly $1 billion, as funds that invest according to the weight of the index components.
According to the Sanjiv Prasad, co-head of Kotak Institutional Equities report due to the increase in the weights of Chinese mainland shares by 260 bps there was a fall in India’s weight by 32 bps.
Some other stocks which will get affected because of this change are L&T with an outflow of $135 million, ITC with $96 million, TATA Motors and Mahindra & Mahindra and many other companies. According to MSCI, there will be changes in the calculation methodology for foreign ownership limits for the Indian stocks, and if this change gets approved, then there will decrease in India’s weight in MSCI Emerging Market Index by a further quarter percentage point.
The Indian market capitalization has declined by $90 million since the beginning of this year only.