India Set to Overtake China in Key Emerging Markets Index: Morgan Stanley

India is on the verge of surpassing China as the most influential country in a prominent emerging markets index, a shift expected to attract increased foreign investments and fuel the nation’s ongoing stock market rally, according to a report by Morgan Stanley.

The investment bank noted that India’s weightage in the MSCI Emerging Markets Index rose to 19.8% after an August reshuffle, closing in on China’s 24.2%. India’s presence in the index has grown significantly from 9.2% in December 2020, while China’s share has declined from 39.1%.

“A rising weight essentially means more absolute foreign flows,” wrote analysts led by Ridham Desai in a note released Wednesday. They highlighted that India remains underweight in the average emerging markets portfolio, further enhancing the potential for foreign portfolio flows.

So far in 2024, foreign portfolio investors (FPIs) have invested ₹531.78 billion ($6.33 billion) in Indian shares, with consistent net buying since June. Factors such as policy stability following recent elections and the prospect of global interest rate cuts have strengthened this trend.

Domestically, robust investments from institutional investors, mutual funds, and retail traders have driven India’s benchmark Nifty 50 index to new highs. Its 16% surge this year has outpaced most global markets, including China.

Morgan Stanley expects the rally to continue, fueled by fiscal consolidation, private sector borrowing, and increased foreign inflows. “We believe the current bull market is only halfway through, with the peak still ahead,” said Desai. The bank maintained India as its top pick among emerging markets and its second favorite in the Indo-Pacific region, following Japan.