Off-balance: How Global Equity Indices Undermine India Story

MSCI METHODOLOGY MAKES INDIA UNDERWEIGHT IN GLOBAL INDICES. AS A RESULT, INVESTORS FAIL TO CAPITALISE ON INDIAN EQUITIES.

- RAJIV RANJAN SINGH

INDIAN EQUITY MARKET, the fourth largest in the world, contributes 3.6% to global market cap, while Indian economy is the fifth largest and contributes 4% to global gross domestic product (GDP). Indian stock indices have also outperformed global indices over last few decades. However, Indian equities are getting less than their fair share of funds allocated by index-based funds and exchange-traded funds (ETFs) globally. Reason is under-representation or low weight on Morgan Stanley Capital Index (MSCI) indices to which about $14.9 trillion assets under management (AUM) are benchmarked. For instance, MSCI All Country World Index (ACWI) captures large, mid, and small caps across developed and emerging market economies. About $4.3 trillion AUM was benchmarked to ACWI in June 2023. Fund managers use MSCI ACWI as a guide for asset allocation and a benchmark for performance of global equity funds. MSCI ACWI comprises stocks of nearly 3,000 companies from 23 developed and 24 emerging markets (as on December 29, 2023). At present, India’s weight in ACWI is just 1.69%; smaller economies U.K. and France are at 3.6% and 2.9% respectively.

The stark dichotomy between the size of the market/economy and country weight is visible in many cases. For instance, capitalisation of Germany’s stock market ($2.3 trillion) is 38% less than India’s ($3.7 trillion). Yet, Germany has 2% weight in the index.