MSCI’s move to put India on notice may impact FII flows, say experts


New Delhi, May 31: MSCI’s move to put emerging markets such as India and Brazil on a notice for limiting access to investors is likely to have an impact on foreign flows to India, experts have told Moneycontrol.
An effect of such a move could mean such investors pulling out of Indian markets as a reduction in weightage of India on its indices.
“The next time when MSCI tries to rejig its index, India’s weightage could see a reduction. As a result, several foreign funds and ETFs (exchange traded funds), among others, have their exposure based on this index. So, that could go down, which would mean reduced FII flows to India,” AK Prabhakar, Head of Research at IDBI Capital told Moneycontrol. If the weight reduction does come through, then it will be negative for the Indian market, but from a six-month perspective, he added.
For the uninitiated, MSCI on Wednesday put India and Brazil on notice. Along with it, Turkey and South Korea have also been put on this list. The index provider also said that three nations are “potential future examples” of markets whose weights could be capped on MSCI indexes.
“In such a case, you are pushing investors’ hand to go for selling. If the weightage does down, one is forced to wind down positions as well and any additional flows to India will also see a cut,” Ajay Bodke, CEO and Chief Portfolio Manager (PMS) at Prabhudas Lilladher, a Mumbai-based financial services firm told Moneycontrol.
What exactly does this mean?
It has to be understood with the kind of investments that FIIs make. One, there are some who actively manage portfolios and don’t benchmark their allocations to indices like MSCI, explains Bodke of Prabhudas Lilladher. Meanwhile, there are passive investors as well.
For instance, they could have funds, which invest in various geographies and in different countries. It could be the case that they may not have the basic research for markets like India and that is when entities such as MSCI come into picture.
“What MSCI decides on their index, will be mirrored in their investments and benchmarked with MSCI. If India’s weightage is reduced in the MSCI, then such investors would also reduce their exposure,” Bodke, CEO and Chief Portfolio Manager (PMS) at Prabhudas Lilladher said.
Reaching Out
Meanwhile, market voices such as that of Nilesh Shah at Kotak Mutual Fund thinks that SEBI and exchanges should reach out to the MSCI to avert this situation. In an interview to CNBC-TV18, he said that there was no fundamental reason for MSCI to reduce weightage on India. With such developments, we need protection against MSCI capping the weightage.
Shah too was of the opinion that the market was at the risk of losing ETF flows if MSCI reduces or limits the weightage.
The announcement by MSCI comes in the backdrop of a controversy surrounding SGX and NSE, wherein the latter barred the Singaporean exchange from launching India derivative contracts.
Earlier on May 29, the Singapore Exchange said it will reschedule the launch of new India derivatives products pending the outcome of the arbitration.
NSE’s index company IISL on May 21 had filed a petition before the Bombay High Court against the SGX under the Arbitration Act seeking urgent interim reliefs against the marketing, promotion and launch of three new contracts called SGX India Futures, SGX Options on SGX India Futures and SGX India Bank Futures, in terms of its circular issued on April 11, 2018.
Pursuant to that, the court had granted an injunction against the launch of the new derivative contracts by SGX.