India's rising weight in a key emerging market index would draw more absolute foreign flows in the country's financial markets, even as it competes with local participants for a share of the pie, Morgan Stanley said on Thursday. The country overtook rival China to become the largest weighting in the MSCI EM investable market index this week, and is on the way to ace its neighbour in the EM index.
India's near 2% weight in the global index is no longer tracking error and therefore, global funds need to buy Indian exchange-traded funds or stocks, the investment bank said in a note.
The firm noted that foreign portfolio flows are being challenged by domestic market participants who are outbidding them. "This is why a growing issuance pipeline is crucial for increasing foreign participation, which we expect to see in the coming months," it said.
India's weightage in the EM gauge jumped to a record of 19.8% from 18.8% in May, while that of table topper China slipped to 24.2% from 24.7%, as per the index aggregator's quarterly review for August.
The rising index weight can be a "tell tale sign of exuberance", Morgan Stanley said, but noted that fundamental factors such as improving free float of Indian companies and rising relative earnings could be the reason. "India's new found position in EM is not a worry."
The country is gaining share in global GDP and in global markets. It remains the US bank's top pick among emerging markets and number two in Asia-Pacific, after Japan.
The bank said any corrections in Indian equities would be shallow, as money on the sidelines will pour in to take advantage of the dip. "A bull market peak is possibly still in the future and India's weight in the EM index could have some more distance to travel before it peaks," Morgan Stanley said.
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