• India has surpassed China in the MSCI equities index for the first time, with a weight of 2.35% compared to China's 2.24%.
• This development is due to India's consistent economic growth, robust flows, and a divergence in earnings growth environment.
• Morgan Stanley predicts India's share will continue to rise due to market outperformance, new issuances, and improvements in liquidity.
• This milestone is expected to attract additional foreign inflows into India's stock market, further strengthening its global position.

India has surpassed China in a crucial MSCI equities index for the first time, fueled by India's consistent economic growth and robust flows. As per a note released by Morgan Stanley on Tuesday, India's weight in the MSCI investible large-, mid-, and small-cap index has escalated to 2.35%, surpassing China's weight of 2.24%.

The team of analysts at Morgan Stanley, led by Jonathan Garner, has projected that India's share will continue to rise due to market outperformance, new issuances, and improvements in liquidity. Garner's team has been closely monitoring the economic trends in both countries and their impact on the MSCI index.

India's nominal gross domestic product (GDP) growth rate is currently in the low teens, which is more than three times the economic growth in China. This has resulted in a profound divergence in earnings growth environment, as per the brokerage firm.

India's Economic Growth and MSCI Index Performance

This divergence is a key factor that has contributed to India's rise in the MSCI index. China's weight on the index had reached its peak in early 2021. However, the economic dynamics have since changed, with India making significant strides in its economic growth.

Earlier this month, Morgan Stanley had predicted that India would surpass China in the MSCI Emerging Markets index. This prediction was based on the observation that India's stock market rally was only past the halfway mark.

The rise in India's weightage in the MSCI indexes is expected to attract additional inflows. Analysts believe that this development will further strengthen India's position in the global market. India has already been recognized as one of the best-performing markets globally this year.

Historical Precedents and Future Implications

The difference in weightage between India and China in the MSCI investible index currently stands at 0.11%, with India at 2.35% and China at 2.24%. This difference, although seemingly small, is significant in the world of finance and investments.

This development is reminiscent of similar historical events where countries have overtaken each other in global indexes due to economic growth and market performance. For instance, in the late 1980s, Japan surpassed the United States in the global stock market capitalization due to its economic boom. However, the situation reversed in the 1990s when the US regained its position due to Japan's economic stagnation.

This development is expected to attract additional foreign inflows into India's stock market, further strengthening its position in the global market. However, it is crucial to continue monitoring the economic trends in both countries to understand their future impact on the MSCI index.