MSCI Rejig: What it Means and How it Will Impact Flows

The global stock market has many benchmarks, and one of the most important among them is the MSCI Index. When the MSCI rejig happens, investors, especially foreign institutional investors (FIIs), pay close attention. Changes in the index can affect billions of dollars of fund flows across global markets, including India.

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What is MSCI?

MSCI stands for Morgan Stanley Capital International. It is a global provider of stock indices that guide institutional investors across the world. Fund managers use MSCI indices to decide where to invest and how much weight to allocate to each market.

The most tracked index is the MSCI Emerging Markets Index, which includes large and mid-cap companies from 24 emerging economies. India forms an important part of this basket. When MSCI changes the weightage of Indian stocks in the index, it directly impacts how much money flows into or out of Indian markets.

What is an MSCI Rejig?

An MSCI rejig is the periodic review of companies included in its indices. MSCI reviews its indices four times a year – in February, May, August, and November. During these reviews, it adds new companies, removes some, and changes the weight of existing ones.

These changes are based on rules like market capitalisation, liquidity, and free float (the number of shares available for trading). For example, if a company’s market cap rises significantly, MSCI may include it in the index. On the other hand, if a stock’s free float reduces, it may get removed.

Why is the MSCI Rejig Important?

The MSCI rejig matters because many global funds track MSCI indices passively. That means they buy or sell stocks according to the weight of the index. When MSCI adds a stock, passive funds must buy it, and when MSCI removes one, they sell it.

This leads to big shifts in foreign institutional investment (FII) flows. For India, which receives significant capital from global investors, an MSCI rejig can affect stock prices, market liquidity, and overall sentiment.

Impact of MSCI Rejig on India

• Inclusion of Indian Stocks: When MSCI includes new Indian companies, foreign investors start buying those stocks. This raises demand and usually pushes prices up in the short term. For instance, when companies like Adani Total Gas or HDFC Bank saw weight increases, they attracted heavy inflows.
• Exclusion of Stocks: On the flip side, exclusion of Indian stocks can trigger selling pressure. Passive funds tracking MSCI have to sell those shares, leading to temporary weakness.
• Sectoral Impact: Sometimes, the rejig shifts focus toward certain sectors. If MSCI increases the weightage of IT or financials, it can channel more foreign capital into those industries. This can create ripple effects across the stock market.
• India’s Weight in MSCI Emerging Market Index: Currently, India has one of the highest weights in the MSCI Emerging Market Index, second only to China. If India’s weight rises further, global investors will be forced to allocate more funds to Indian equities. This will strengthen India’s position in global portfolios.

How Does MSCI Decide on Rejig?

• Market Capitalisation: Large and mid-cap stocks are considered.
• Liquidity: Only actively traded stocks qualify.
• Free Float: Shares available to the public matter more than promoter holdings.
• Global Investability Standards: Stocks must be open and accessible to foreign investors.

How MSCI Rejig Affects Flows

• Passive Flows: These are automatic fund flows from exchange-traded funds (ETFs) and index funds that strictly mirror MSCI indices. For example, if MSCI adds a stock worth 0.5% weight, global funds tracking the index will buy that stock to match the weight.
• Active Flows: Active fund managers use MSCI indices as benchmarks but don’t copy them blindly. If they like the story behind a newly added company, they may increase exposure beyond the weight assigned.
• Market Sentiment: MSCI rejigs also influence sentiment. If India’s weight increases, investors read it as a signal of stronger growth and higher global relevance. This often leads to further buying from FIIs.

MSCI Rejig and the Indian Retail Investor

You may wonder how an MSCI rejig affects you as a retail investor. While foreign flows drive short-term stock movements, the long-term value of a company depends on fundamentals. A stock included in MSCI may rally quickly, but it does not guarantee long-term performance.

Challenges Linked to MSCI Rejigs

While MSCI rejigs are generally positive for markets, they also come with challenges:

• Sudden inflows or outflows can cause volatility.
• Stocks included in the index may get overvalued quickly.
• Excluded stocks may fall even if their fundamentals remain strong.
• Retail investors risk chasing short-term rallies without understanding long-term value.

Conclusion

The MSCI rejig is more than a technical event. It plays a key role in directing global capital flows and shaping market trends in India. For Indian investors, it offers opportunities to benefit from foreign inflows but also brings risks of volatility.

If India’s weight in MSCI Emerging Markets Index keeps rising, it signals stronger global confidence in the Indian economy. At the same time, investors should stay cautious, study company fundamentals, and not follow foreign flows blindly.

The smart approach is to use the MSCI rejig as an indicator of market direction while building a portfolio based on long-term goals. That way, you can benefit from global flows while staying secure in your financial journey.