MSCI Index and its Rebalancing Impact on Indian Stock Market

 

“The MSCI Momentum Indexes are rebalanced on a semi-annual basis, usually as of the close of the last business day of May and November coinciding with the May and November Semi-Annual Index Review (SAIR) of the MSCI Global Investable Market Indexes.

“India’s Weightage is increased to 8.07% in the MSCI Index”

In today’s blog, we will discuss the MSCI Rebalancing Index and how it affects Indian Stock Market:

What is MSCI Index?

In 1969 MSCI (Morgan Stanley Capital International) published the Developed Markets Index, which covers countries considered developed, such as the United States, Canada, and the United Kingdom.

Emerging Markets also appeared in 1987 (Now one of the most popular and most visited indices) Index. The index currently covers 26 countries and includes over 1,400 stocks. India has also been included in the index since 1994. 

MSCI weights each of these stocks in their respective indices based on Market Cap at the end of the trading day. Market capitalization is calculated as follows: 

Market Capitalization = Stock price * Number of shares outstanding

Stocks with the highest market capitalization receive the highest weight. The reason is that large companies have a greater impact on the economy. This reflects a better picture of the economy than we see for mid-and small-cap companies. 

What is MSCI Index India?

The MSCI India Index is designed to measure the performance of the Large & Midcap  segment of India market. The index has 114 constituents and covers approximately 85% of Indian equities. The MSCI India Index was launched in the year 1994.

 

Here are the top 10 constitutes of the Indian Index ;

What is Rebalancing of the Index?

A company that is not part of an index may do so well that it may become bigger than the companies that are part of an index. So how does that company make it to the index? For that to happen, index providers conduct so-called rebalancing or review of their indices every quarter. During a review, they assess if a stock or stocks which are not part of their index can dislodge a stock which is part of the index. This is done based on pre-determined quantitative parameters like free-float market cap, sector composition etc. For instance, Tata Consumer Products replaced state-owned Gail India in the benchmark Nifty 50 index in March 2021. This was because the former's free float market cap had surpassed that of Gail during the review period.

 Impact of Rebalancing on the Stock Market

Typically, a stock that gets added to a large index tends to do well, while the one that gets removed tends to underperform. This is because whenever a stock is added or removed from an index, the ETFs tracking the index also have to realign their portfolios. In other words, they have to sell a stock that is removed and buy a stock that gets added. Analysts try to predict which stock will get added and removed based on publicly available data ahead of an official announcement so that they can position themselves to benefit from the ensuing rebalancing by ETFs.

 

MSCI Index has given ETFs 14 days to rebalance their portfolios.