For the first time in more than two decades, no Indian company is among the top 10 constituents of the MSCI Emerging Markets (EM) Index, one of the world’s most influential benchmarks for emerging-market investments.
The development marks a significant shift in global investment trends and highlights how technology and artificial intelligence (AI)-driven companies are attracting a growing share of international capital.
HDFC Bank and Reliance Slip Out of Top Rankings
India’s largest representatives in the MSCI EM Index, HDFC Bank and Reliance Industries, have recently dropped to the 11th and 12th positions, respectively. Earlier this year, both companies were ranked within the top 10.
Their individual weight in the index has also fallen below 0.8%, reflecting a broader reduction in India’s influence within the benchmark.
As a result, India’s total weight in the MSCI Emerging Markets Index has declined to 10.87%, the lowest level seen in nearly six years. This is a sharp contrast to 2024, when India briefly became one of the largest contributors to an MSCI emerging-market benchmark before China regained the lead.
Why MSCI Index Weight Matters
The MSCI Emerging Markets Index is closely followed by institutional investors across the globe. Hundreds of billions of dollars are invested through exchange-traded funds (ETFs), index funds, pension funds, and other investment vehicles that track this benchmark.
When a country’s weight in the index declines, passive investment funds must automatically reduce their exposure to that market during scheduled rebalancing exercises. This process is driven by index methodology rather than any active decision by fund managers.
The impact extends beyond passive investing. Active fund managers also use MSCI benchmarks as performance references. A lower index weight makes it easier for them to allocate less capital to India without significantly deviating from benchmark expectations.
Technology Boom Reshaping Global Capital Flows
One of the major reasons behind India’s reduced weight is the increasing dominance of technology and AI-related companies in global equity markets.
Investors worldwide have poured capital into technology giants and semiconductor firms, leading to a redistribution of funds across emerging markets. Countries and companies benefiting from the AI boom have seen stronger market performance, while others have experienced a relative decline in benchmark representation.
Domestic Equity Inflows Also Slow Down
At the same time, Indian equity markets are facing softer domestic inflows.
According to industry data, equity mutual fund investments declined significantly in May, reaching their lowest level in approximately a year. Investors turned cautious amid rising global uncertainties and volatility in commodity markets.
Small-cap, mid-cap, and large-cap mutual fund categories all witnessed lower inflows as market participants adopted a wait-and-watch approach.
Rising Crude Oil Prices Add Pressure
Higher crude oil prices have emerged as another concern for India’s economy.
As one of the world’s largest oil-importing nations, India is particularly vulnerable to sustained increases in energy costs. Elevated crude prices can increase the country’s import bill, widen the current account deficit, and put additional pressure on foreign exchange reserves.
The situation has also contributed to market volatility, influencing investor sentiment across multiple asset classes.
Government Takes Steps to Attract Foreign Capital
In response to growing pressure on capital flows and external balances, the Indian government recently introduced several measures aimed at encouraging foreign investment.
The reforms include:
- Tax-related relief for foreign portfolio investors holding government securities.
- Expansion of investment opportunities in long-term and green bonds.
- A special foreign currency deposit facility designed to encourage overseas fund inflows into the banking system.
These initiatives are intended to strengthen India’s attractiveness to international investors while supporting financial stability.
Focus on Global Bond Index Inclusion
The latest reforms also come ahead of an important review by Bloomberg Index Services regarding India’s possible inclusion in its Global Aggregate Bond Index.
Market experts believe that successful inclusion could attract billions of dollars in passive foreign investments over time, potentially providing a significant boost to India’s capital markets.
However, Bloomberg had previously highlighted concerns related to settlement systems and trading infrastructure. Whether recent policy changes fully address those issues remains to be seen.
