The semi-annual rebalancing of the MSCI indices for May 2025 has resulted in several significant changes for Indian equities. The announcement, made on May 14, 2025, revealed the inclusion of Nykaa (FSN E-Commerce Ventures) and Coromandel International in the MSCI Global Standard Index. These changes will be effective from the close of trade on May 30, 2025.
Inclusions and Exclusions in MSCI India Index
The inclusion of Coromandel International and FSN E-Commerce Ventures (Nykaa) in the MSCI India Index is expected to drive substantial passive fund inflows. According to Nuvama Alternative & Quantitative Research, Coromandel International may witness inflows of around $252 million, while Nykaa is expected to see inflows of approximately $199 million. Conversely, auto components manufacturer Sona BLW Precision Forgings Ltd. has been excluded from the MSCI India Index.
MSCI India Smallcap Index Rejig
The MSCI India Domestic Smallcap Index has also undergone a reshuffle. Twelve stocks have been added to the index, including Tata Technologies Ltd., AWL Agri Business Ltd., Hexaware Technologies Ltd., Authum Investment and Infrastructure Ltd., Sai Life Sciences Ltd., International Gemmologic Laboratory Ltd., Dr Agarwal's Health Care Ltd., Sagility India Ltd., Godrej Agrovet Ltd., Acme Solar Holdings Ltd and Premier Energies.
However, this inclusion comes with exclusions. Twenty-one stocks have been removed from the MSCI India Smallcap Index, including Coromandel International Ltd., Godrej Industries Ltd., Shyam Metalics and Energy Ltd., Gateway Distriparks Ltd and others.
Impact of MSCI Rebalancing
MSCI index rebalancing is a crucial event for the Indian stock market, as it influences the flow of investments from foreign portfolio investors (FPIs). Large global investment funds, including numerous exchange-traded funds (ETFs), closely track MSCI indices. Consequently, any changes in these indices are mirrored in their holdings, leading to significant buying or selling activity in the affected stocks.
The inclusion of a stock in an MSCI index typically leads to increased demand from global investors, driving up the stock price and improving trading volumes and liquidity. Conversely, exclusion from an index can result in selling pressure, a decline in stock prices, and reduced trading volumes.
Historical Context and Market Dynamics
During the previous MSCI rebalancing in February 2025, Indian equities experienced an influx of approximately $1 billion in passive inflows. Stocks such as IndusInd Bank, Zomato, and Varun Beverages saw major weight increases during that period.
The inclusion of stocks in MSCI indices is not an information-free event. Studies have shown that stocks added to major indices often experience a sharp rise in prices after the announcement and leading up to the actual change date. However, some of these gains may be lost after the change takes effect. Deletions from the indices, on the other hand, typically lead to a steady decline in stock prices.
Methodology and Implementation
MSCI maintains and calculates indices but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the index or Index Linked Investments. The imposition of these fees and charges would cause the performance of an Index Linked Investment to be different than the MSCI index performance.
MSCI classifies index maintenance into two broad categories: index rebalancing and market or corporate event-driven changes. To minimize market impact and transaction costs, MSCI may implement a two-phase transition, applying one-half of the full index weight of both additions and deletions in each phase.
