The Impact in India of Including China-A Shares in the MSCI Index

A country’s classification in MSCI can have significant impact on the equity markets of that country, as it can drive large flows in or out of the country by passive asset managers. Index funds, exchange traded funds, mutual funds , pension funds and sovereign wealth funds that have assets under management passively tracking an MSCI benchmark would have to buy constituents of a country that is included in their benchmark or sell constituents of a country that is deleted from their benchmark.

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Currently, India’s current weightage is 7.49 percent and China’s is 24.88 percent in the MSCI Emerging Market index. Post the inclusion of China-A shares in the MSCI Index, India’s weight may reduce to 7.13 percent while China may stand at 28.51 percent in the index.  It is estimated, India may see selling worth USD 3.8 billion and exchange traded fund ( ETF )-related selling worth USD 0.9 billion as India’s weightage in the index could reduce as a result.

But the US index provider MSCI’s  has delayed the decision to include Chinese ‘A’ shares in its emerging market index, thereby boosting the prospects of more foreign fund inflows into the Indian markets, going ahead. This decision could provide a short term advantage to Indian markets, but the Indian shares could come under pressure once MSCI takes the decision to include China A-shares in its emerging index in the near future.

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