India has overtaken China to become the largest emerging market in the MSCI All Country World Investable Market Index (ACWI IMI), marking a significant shift in the global investment landscape. As of the end of August, India's weight in the index reached 2.35%, edging ahead of China at 2.24%, and placing India just behind France, which holds a marginal 0.03% lead. This development highlights India’s growing importance in global capital markets, despite passive inflows from exchange-traded funds (ETFs) that track the index remaining relatively modest, with assets under $2bn, Business Standard reported.

The MSCI ACWI IMI tracks stocks in the large- and mid-cap space globally, and its composition offers a comprehensive overview of the global equity market. India, which has traditionally trailed China in market weight, has more than doubled its share since 2021. This has coincided with a period during which China’s weight in the same index has halved. For the first time, India is not only the largest emerging market but now ranks as the sixth-largest overall in the MSCI ACWI IMI, reinforcing its appeal to global investors. While this ascent may not dramatically alter passive investment flows, analysts believe it could bolster India’s attractiveness to international capital.

Jonathan Garner, Morgan Stanley’s chief equity strategist for Asia and emerging markets (EM), noted that India's position will likely strengthen further due to its market outperformance, coupled with new issuances and improved liquidity. Garner emphasised the disparity between India and China, stating that India's nominal GDP growth is in the low teens, over three times faster than China’s. This has resulted in a "profound divergence" in the operational and earnings growth of companies between the two nations. At present, India’s stock market weight is 22.27% within the MSCI Emerging Markets IMI, outpacing China by 70 basis points (bps), which stands at 21.58%.

Passive funds with approximately $125bn in assets track this index, while the main MSCI Emerging Markets Index, which India is also a part of, is tracked by funds managing around $500bn. China’s decline in weight across MSCI indices is a reflection of its broader economic slowdown and ongoing challenges, which include regulatory crackdowns and concerns about market transparency. Meanwhile, India’s steady economic growth, supported by structural reforms and robust domestic consumption, has made it increasingly attractive to foreign investors.

Morgan Stanley has positioned itself accordingly, maintaining the largest overweight on India and Japan at 150bps each within its pan-Asian and EM portfolios, while holding a 150bps underweight on China. Despite India’s gains in the MSCI ACWI IMI, the nation still trails China in the MSCI ACWI Index, which tracks both large- and mid-cap companies.

As of mid-September, India’s weight in this broader index stood at 2.07%, behind China’s 2.41%. However, experts suggest that the trends favouring India could continue, driven by its higher growth potential and improving market conditions. India’s growing stature in global indices such as the MSCI reflects the broader shift in the country’s economic and financial ecosystem. With initiatives aimed at improving ease of doing business, increasing foreign direct investment, and expanding financial markets, the country is poised to further enhance its global standing.

This milestone comes at a time when India's domestic economy is gaining momentum, with key sectors such as technology, pharmaceuticals, and consumer goods driving growth. India’s ability to sustain this growth trajectory will be crucial in attracting more global capital, potentially helping it to close the gap with larger developed markets like France, while solidifying its lead over China in the emerging markets space.