India has overtaken China to become the largest weightage in the MSCI EM Index. The ascend to the top happened on Wednesday.

Brokerage firm Morgan Stanley believes that an increase in weightage will essentially mean more absolute foreign flows. “In the context of India being underweight in the average EM portfolio, this is even better for foreign portfolio flows,” the brokerage wrote in a note.

India’s nearly 2% weightage in the global index will imply that global funds need to buy Indian ETFs or stocks.

“However, the problem for foreign portfolio flows is that the domestic market participants are outbidding them. This is why the growing issuance pipeline is important for rising foreign participation, which is what we predict in the coming months,” the note said further.

After adjustments, the foreign institutions were buyers to the tune of over ₹7,200 crore in the month of August, while domestic institutions were net buyers worth over ₹50,000 crore, without adjustments.

Morgan Stanley believes that India’s new found position in the Emerging Markets basket is not a worry but rising index weightage can be a tell tale sign of exuberance.

The brokerage has cited China’s performance after becoming the largest EM weightage in October 2008. “Its (China) relative performance did suffer for a while but it continued to ascend in weight terms and recovered in performance only to peak much later in October 2020,” the note said.

India remains Morgan Stanley’s top pick within the Emerging Market context and their “Number 2” pick in the AsiaPacific context after Japan.

“We believe that a correction in stocks could drive money on the sidelines to pour in, making such corrections relatively shallow,” Morgan Stanley said. The brokerage had earlier written about the factors that could trigger a correction in the equity markets.

Morgan Stanley added that a bull market peak is still in the future and India’s weightage in the EM index could have some more distance to travel before it peaks.

The Nifty 50 index has recovered over 4,000 points from the lows of July 23, when the index fell to levels of 21,281 on the day of the Union Budget.