India has fallen out of the top 10 in the MSCI Emerging Markets Index for the first time in 26 years, a benchmark that shapes how hundreds of billions of dollars are allocated to developing economies worldwide.
India's two largest constituents in the index, HDFC Bank and Reliance Industries, slipped to 11th and 12th positions in recent months, from 7th and 8th in March. Their individual weightings have each fallen below 0.8% of the index.
India's overall weight dropped to 10.87% — a six-year low, and roughly half the record level reached in 2024, when the country had briefly emerged as the largest component of an offshoot index, the MSCI EM Investable Market Index, before China reclaimed the position.
The shift in capital markets towards artificial intelligence and technology stocks is behind this change.
The MSCI EM index functions as an instruction for a significant portion of global institutional capital. Passive funds — exchange-traded funds and index funds whose investment mandates require them to mirror the index — manage more than $700 billion in assets benchmarked to MSCI EM.
When a country's weight falls, passive funds are required — by their investment mandates, at scheduled quarterly rebalancing events — to reduce their holdings proportionally.
The effect on actively managed funds is less mechanical but equally consequential. An active fund manager who wants to hold less India than the index dictates is making a deliberate, accountable bet — and must defend it to clients.
India's index de-ranking arrives alongside a separate squeeze on domestic capital markets. Equity mutual fund inflows fell 40% month-on-month to ₹229.08 billion ($2.4 billion) in May — their lowest in a year — as volatility tied to the Iran war kept domestic investors cautious.
The government has announced a package of foreign investment reforms, including an ordinance exempting foreign portfolio investors from income tax on interest and capital gains from government securities, an expansion of bond categories accessible to foreign investors, and a concessional foreign currency deposit window.
