India Slips to Third Place in MSCI Emerging Markets Index Amid Sell-Off

India's position in the MSCI Emerging Market Index has weakened, slipping to third place behind China and Taiwan. The country's weightage in the index has also dropped below the key 20% threshold amid ongoing market corrections and significant sell-offs in domestic equities.

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Decline in India's Weightage

India’s representation in the MSCI EM and MSCI EM Investable Market Index (IMI)—two indices that collectively see foreign investment inflows of up to half a trillion dollars—has been on a downward trajectory. The key reason behind this decline is the outperformance of China and Taiwan’s equity markets relative to Indian blue-chip stocks.

In September 2024, when India's frontline indices soared to record highs, its weightage in the MSCI EM index stood at approximately 20.8%, securing the second position. However, a downturn in the domestic market led to a massive wealth erosion of nearly $1 trillion, causing the valuation of Indian stocks within the index to decline. By January 2025, India's weight had fallen to 18.41%, pushing the country down to third place in the index rankings.

China Reclaims the Top Spot

In August 2024, India briefly overtook China in the MSCI EM Investable Market Index (IMI), emerging as the largest component. At that time, it was also on the verge of surpassing China as the leading weight in the broader MSCI EM index. However, with sustained selling pressure in Indian markets, China regained its dominance in October. By January 2025, India's weightage had dropped further to 19.7%, a sharp decline from 22.3% in September 2024.

Despite this setback, India continues to have a strong presence in the index, with three of its major companies—HDFC Bank, Reliance Industries, and ICICI Bank—featuring among the top 10 constituents.

Potential for Recovery

While India's weightage has seen a decline in recent months, there is optimism for a rebound. The MSCI's quarterly rebalancing, set to take effect after market close on February 28, is expected to push India's weight back up to 19%. This adjustment is likely to attract passive inflows between $850 million and $1 billion, according to estimates from Nuvama Alternative & Quantitative Research.

The upcoming rebalancing is expected to benefit certain stocks significantly. The recent listing of Hyundai Motor India is projected to bring in approximately $257 million in passive inflows. Additionally, IndusInd Bank is likely to see an inflow of about $264 million as part of the rebalancing process.

Broader Market Trends

The fluctuations in India's weightage within the MSCI EM index reflect broader market trends, including foreign institutional investor (FII) activity and global economic conditions. The recent correction in Indian equities was influenced by a mix of factors, such as rising U.S. bond yields, geopolitical uncertainties, and profit booking by institutional investors.

However, analysts believe that India remains an attractive investment destination in the long run. The country's strong economic fundamentals, growing corporate earnings, and structural reforms could help it regain lost ground in global indices. If Indian equities rebound in the coming months, the country may once again challenge China and Taiwan for a higher weightage in the MSCI EM index.

Foreign investor sentiment will play a crucial role in determining India’s future position in the index. A resurgence in capital inflows, coupled with sustained earnings growth in key sectors like banking, technology, and manufacturing, could boost India's standing in global equity markets.

Despite slipping to third place in the MSCI Emerging Market Index, India remains a key player in global equity markets. While recent market corrections have impacted its weightage, the upcoming rebalancing provides hope for a potential recovery. The inclusion of new stocks and expected passive inflows could support India's position in the MSCI EM index, reinforcing investor confidence in the country’s long-term growth story.