What could be the impact of MSCI putting off its decision to increase India’s weight in the MSCI index?

This is not the first time but the second time in succession that the MSCI has deferred a decision on increasing India’s weightage in its global indices. With the government tweaking norms and putting FPI investments at par with the FDI investments, 74% window opens up for FPI investments almost in most of the sectors and enhances the FPI limit.

The NSDL and CDSL have already published the list of companies where there has been an increase in FPI legroom. However, MSCI has reiterated its stand of April that it would prefer to wait and watch how the practical implementation of the new limits plays out. The MSCI opined that it would require more clarity before implementing the changes.

Why is the weight increase by MSCI important? Most of the passive ETF flows and index fund flows into India are benchmarked to MSCI indices. So an increase in weightage in the MSCI indices will automatically result in billions of dollars of foreign portfolio flows into India and the action is most pronounced in sectors with the largest leg room available.

Currently, India’s weight in the MSCI has been constrained due to the low foreign inclusion factor of Indian companies due to their limited free float. While India is among the top 10 markets globally in terms of full market cap, it ranks 13th in terms of free-float market capitalization and that is resulting in disproportionately low level of foreign flows.