India’s MSCI Index Changes Could Attract $3 Billion in Inflows by August End

India is expected to see up to $3 billion in inflows by the end of August due to changes by index provider MSCI. Seven new stocks will be added to the MSCI Global Standard index, and the weight of HDFC Bank in the index will also increase. Additionally, MSCI has lifted restrictions on Adani Group stocks, allowing them to be considered for inclusion in the indices.

These changes will take effect after the close of trading on August 30. Global passive funds, like exchange-traded funds (ETFs), which follow these indices, will need to adjust their portfolios to reflect the new composition. As a result, India’s weight in the MSCI Emerging Markets index is expected to rise to a record 20%, up from the current 19.4%, according to Nuvama Alternative & Quantitative Research.

Abhilash Pagaria, head of Nuvama Alternative & Quantitative Research, predicts that these changes could lead to foreign institutional investor (FII) inflows of $2.7 billion to $3 billion. He also suggests that if the current trend continues, India’s weight in the index could exceed 22% by the end of the year.

HDFC Bank’s weight in the MSCI index will increase in two stages—one in August and another in November—if foreign investment remains strong. Initially, its weight will rise by 1.85% in August. The market had expected a more significant increase to between 7.2% and 7.5%, which could have brought in around $3.8 billion. However, with the phased approach, inflows are now expected to be around $1.8 billion. HDFC Bank’s shares dropped by nearly 3.5% to ₹1,604.

MSCI is adding seven companies to its global standard index, including Dixon Technologies, Vodafone Idea, Oil India, Zydus Lifesciences, Railway Vikas Nigam, Prestige Estates, and Oracle Financial Services, while Bandhan Bank has been removed from this index.

MSCI has also lifted the freeze on Adani Group stocks, making them eligible for future inclusion in the indices. This change follows MSCI’s decision in January 2023 to exclude certain Adani stocks due to uncertainty, but recent developments, like qualified institutional placements, have improved the free float of Adani Energy Solutions, making it a potential candidate for index inclusion. However, Adani Total Gas, which was also excluded, is still trading at a lower value and may not be added soon.

MSCI will continue to monitor the situation with Adani Group stocks and issue updates as needed.

Additionally, MSCI has updated its India small-cap index, adding 27 new stocks, including Bandhan Bank, Go Digit General Insurance, Protean eGov Technologies, Paras Defence and Space, and Aditya Vision. Stocks like Dixon Technologies, Cochin Shipyard, IREDA, HUDCO, Network 18 Media and Investment, and Jaiprakash Associates have been removed from the small-cap index.