What is the MSCI India Index and its rebalancing effects? | Espresso

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What is MSCI India Index? How does rebalancing impact investors and the stock market?

May 30, 2023
What is MSCI India Index? How does rebalancing impact investors and the stock market?

You will have heard of the Nifty or the Sensex, which are indexes built to depict the average performance of the stock market. But there is one more important index that investors must know about: the MSCI India Index.Unlike the Nifty or the Sensex, which are popular in India, the MSCI India Index is commonly used by foreign investors to track the performance of the Indian stock market.

The big difference: the MSCI India Index is a dollar-denominated index, which represents the performance of the Indian stock market in dollar terms (effectively adjusting for movements in the rupee-dollar pair).

After all, a US-based investor will be interested in dollar-adjusted returns. Think of it this way, if the stock market in India went up 10% during a particular period but the Indian rupee fell 5% against the US dollar during the same time, the foreign investor’s return is only 5% after the currency conversion.Because the MSCI India Index is globally a widely-tracked barometer of the Indian stock market, it has implications for Indian investors as well, which we will discuss further in this article.

What is the MSCI India Index?

The MSCI India Index is constructed and maintained by MSCI, an investment research company that provides market indexes and performance analysis tools to institutional investors.
MSCI offers indexes that track the performances of various stock markets, based on various parameters, such as regional (emerging markets or country-specific indexes), asset classes (equity, fixed income etc) as well as themes (ESG or climate investing).
The MSCI India Index tracks the performance of the Indian stock market by creating a market-cap weighted portfolio of leading Indian companies.

The Basics of the MSCI India Index

The MSCI India Index was launched on April 30, 1993. It consists of 114 individual stocks, which represents around 85% of all Indian equities. Reliance Industries has the highest weightage in the index, to the tune of 10.16%.MSCI reviews this index periodically, and tweaks it depending on the changes to the value of the shares available in the public domain (free float market capitalisation). This means that sometimes old companies get dropped while new companies enter the index.

Because the performance of the constituents is primarily measured in dollar terms (though there is also a rupee variant), the performance of the MSCI India Index can be different from that of the Sensex of Nifty.

For instance, the Nifty has given a compounded annualised growth rate (CAGR) of 11.75% over the past 10 years. But as you will see in the below table, the MSCI India Index has returned a lower 7.13% during the same period. The returns are lower because they adjusted against the performance of the Indian rupee versus the US dollar.(Note: Emerging market currencies will tend to drift lower against a currency such as the US dollar. This is typically driven by the inflation differential – that is, inflation in the US tends to be lower than in India.)

ESDBLog-202307041538558555102.jpg
(Source : MSCI )

Various foreign portfolio investors, such as active mutual funds, ETFs, hedge funds, sovereign wealth funds etc use the MSCI India Index to measure their performance. These funds can be either India focused or may devote some portion of their assets to Indian equities, such as a part of an emerging market equity portfolio.

Investors are typically of both forms: active portfolio managers (where the idea will be to beat the index) as well as passive funds, which will blindly copy the index.

https://www.myespresso.com/images/Final%20BLog-202306011917339669029.png
(Source : MSCI )

What is MSCI India Index Rebalancing?

The periodic reviewing and adjustment of its constituents to accurately represent the market performance and movement is known as ‘rebalancing.’ Indexes are typically rebalanced quarterly to maintain representational accuracy. There are various reasons why the rebalancing of an index may be required:

  • All stocks undergo a change in market capitalisation due to their fluctuating stock prices. Moreover, the number of outstanding shares available to the public may also change over time because of insider buying and selling.
  • The need for listing or de-listing of a stock may arise, which completely changes the constitution of the index. This may also be affected by a merger or de-merger of entities listed on the index.
  • The index may also be rebalanced to ensure adequate liquidity for investors who invest in ETFs and other funds that use the index as a benchmark.

How rebalancing impacts investors & the stock market:

A rebalancing in the MSCI Index has implications for Indian stocks. If MSCI reduces the weightage of a stock or brings it down to zero, it will result in selling pressure on the stock as fund managers tweak their portfolio to align themselves to the index. Similarly, an increase in weightage or addition of a new stock will result in buying interest in the stock.

The rebalancing directly affects passive funds, which are forced to adjust their portfolio weightage and bring them exactly in line with the revision.MSCI typically announces these changes a few weeks in advance. This means that stocks affected by the changes may see volatility both on the day of the announcement of changes as well as on the day of the rebalancing itself.         

Sources:

  1. AUM in ETFS Linked to MSCI Equity Indexes- MSCI Inc.
  2. Index methodology- MSCI (MSCI India Index)

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do’s and Dont’s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Brokerage will not exceed the Exchange prescribed limit.

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!