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MSCI India weightage cut may have little impact

Sangita Shah & Savio Pinto

The significant reduction in the India weightage by the Morgan Stanley Capital International Emerging Market Free Index may turn out to be a wet fuse, market sources said.

"Some stocks may be impacted in the first couple of days, largely due to the psychological damage of their weightage in the India basket being reduced, but in the medium to short term, it is unlikely that the MSCI rebalancing will have any great impact on either the market or portfolio inflows," sources added.

MSCI on Saturday had announced a 40 per cent cut in India's weightage in the EMF from 7.5 per cent to 4.49 per cent. The India weightage in the MSCI All Country World Index has also come down from 0.35 per cent to 0.12 per cent, a fall of 0.23 percentage points.

The number of companies in the Index has been reduced from 73 to 59, with the axe falling on prominent market favourites like Sun Pharmaceuticals, DSQ Software, Aptech, Jai Prakash Industries, Essel Packaging and Escorts. Notable among the inclusions are Reliance Petroleum, VSNL and HDFC Bank.

Of the total 59 stocks in the rebalanced Index, which comes into effect in two phases, first on November 30, 2001 and second on May 31, 2002, 13 are information, communication and entertainment stocks, five are from the pharma sector and another five are banking and finance stocks.

Dr Reddy's Laboratories has the largest foreign inclusion factor- akin to weightage- in the revised index at 0.59, followed by Silverline Technologies at 0.53. In line with the revised MSCI methodology of adjusting country and stock weights for free floating stock adjustments, Wipro gets the least weightage at 0.15.

Though the reduction in India weightage was expected and largely discounted in the markets, the sharp reduction has caught some sections unawares.

"Analysts had mentioned in passing a decrease of 25-60 per cent. However, the final decrease of 40 per cent is bad news for the market. One could see the market moving down and remaining sideways for the better part of this week," Arun Kejrival of research outfit KRIS said.

"There will be no immediate impact on FII investment," a foreign fund manager said.

But portfolio managers said the changes will not have any immediate impact on foreign portfolio investments in the near term as the index will be implemented only by the end of the (calendar) year, and fully by middle of next year.

"There will be no immediate impact on FII investment in the country and no immediate selloffs will take place," a foreign fund manager said.

Fund managers said most FIIs have their own views on the markets irrespective of the MSCI, which is used only as a model portfolio allocation.

"Since a lot of funds have already invested in India and find it a defensive market, it is unlikely that they will withdraw funds because of the recast. In times of the continuing US slowdown, India is perceived as a good hedge. This goes against the technical wisdom of classifying markets by value of free floating stocks alone," a fund manager said.

"While there will be no short- term impact, we have to be careful of the long-term implications," Nilesh Shah, chief investment officer, Templeton MF said.

"Among the Asian markets, India's weightage may continue to remain bullish. Therefore, it doesn't prevent a fund manager from increasing his exposure to India over and above the MSCI index," another fund manager said.

Various India dedicated funds follow domestic indices like the S&P CNX Nifty, Sensex, BSE-200 and others. MSCI is usually followed by regional funds and their total investments are only 20-22 per cent of the FIIs' total invested funds. Besides, they are in any case underweight on the Indian markets, he added.

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