India Overtakes China in MSCI Index for the First Time, Driven by Stock Market Boom

India has surpassed China for the first time ever in a key MSCI equities index, driven by steady economic growth and strong inflows.

India’s weight in the MSCI investible large, mid and small-cap index has risen to 2.35 per cent, higher than China’s weight of 2.24 per cent, Morgan Stanley said in a note on Thursday.

"India will continue to gain share due to market outperformance, new issuances and liquidity improvements," analysts led by Jonathan Garner of Morgan Stanley said.

According to the global brokerage firm, India’s nominal gross domestic product (GDP) growth rate is running in the low teens, more than thrice the economic growth in China, generating a “profound divergence in earnings growth environment”.

China’s weight on the index had peaked in early 2021.

The MSCI Index - Morgan Stanley Capital International Index - serves as a benchmark for international investors, showcasing the performance of companies. Foreign Institutional Investors (FIIs) heavily rely on this gauge when deciding to allocate capital to domestic markets.

India is now the sixth largest market globally, narrowly behind France, the brokerage said.

Earlier this month, Morgan Stanley projected that India will surpass China in the MSCI Emerging Markets index as India’s stock market rally was “only past the halfway mark”.

Analysts suggest India's increasing weight in the MSCI indexes will attract more inflows.

India is among the best-performing equity markets globally. This year so far, benchmark indexes NSE Nifty 50 and S&P BSE Sensex surged 17 per cent and 15 per cent, respectively.

On the other hand, China’s Shanghai Composite Index is down around 9 per cent this year amid concerns over the economy and real estate sector.

Morgan Stanley says India will continue to gain share due to market outperformance, new issues and liquidity improvements. It remains ‘overweight’ on India and ‘underweight’ on China in its pan-Asia EM asset allocation.

India's growing leadership position is coming at a time when the US Federal Reserve is expected to reduce its key rates to achieve a soft landing. Traders are anticipating a half-point cut, even with retail sales figures exceeding expectations. The interest rate cuts by the US Fed could bring inflows to emerging markets with India expected to gain the most among them.