India falls out of EM index top 10 for first time in 26 years—What that means & why it matters

India’s Historic Drop from EM Index Top 10: Implications and Broader Context

India falls out of EM index – For the first time since 2000, India has lost its position among the top 10 companies in the MSCI Emerging Markets Index, a key metric influencing global investment allocations. This marks a significant shift in the country’s market presence, as the index now excludes all Indian firms from its elite rankings.

Constituent Companies Lose Ground

Two of India’s largest contributors to the index—HDFC Bank and Reliance Industries—have fallen to 11th and 12th spots, respectively. Their individual weights in the index have dipped below 0.8%, signaling a notable decline in their influence. Meanwhile, India’s overall weight in the index has shrunk to 10.87%, a six-year low and half of the peak level recorded in 2024, when the nation briefly held the largest share in an offshoot index before China reclaimed it.

Capital Market Realignment

The drop reflects a growing focus on technology and AI-driven stocks within emerging markets. As global capital markets prioritize innovation over traditional sectors, India’s corporate landscape has been increasingly overshadowed by these high-growth assets.

Global Investment Dynamics

The MSCI EM Index acts as a compass for trillions in institutional investments. Passive funds, such as ETFs and index funds, mirror the index to manage over $700 billion in assets. Total assets tracked against MSCI’s emerging market benchmarks surpass $1.8 trillion, including active funds that compete against the same standard.

Passive vs. Active Strategies

Passive funds adjust holdings mechanically when a country’s weight declines, following quarterly rebalancing protocols. This is driven by algorithmic rules, not subjective judgment. In contrast, active managers face more nuanced decisions. By reducing India’s exposure, they make deliberate, justifiable choices that require transparency to clients, with the cost of such adjustments becoming less burdensome as the country’s weight decreases.

Domestic Market Challenges

India’s index de-ranking coincides with a separate struggle in its equity markets. Equity fund inflows plummeted 40% in May to ₹229.08 billion ($2.4 billion), their lowest level in over a year, as investor uncertainty persisted due to geopolitical tensions in the Middle East. Inflows into small-, mid-, and large-cap funds fell 28%, 33%, and 37%, respectively, according to the Association of Mutual Funds in India.

“Crude oil prices hovering near $100 per barrel directly triggered this investor retreat,” said Venkat Chalasani, CEO of AMFI, to Reuters.

Economic Exposure and Policy Measures

India’s reliance on oil imports exacerbates the impact of rising prices. Higher crude costs increase the import bill, widen the current account deficit, and strain foreign exchange reserves. To counteract this, the government raised gold and silver import tariffs to 15% from 6%, while Prime Minister Narendra Modi urged citizens to avoid gold purchases for a year.

“Elevated crude prices inflate the import bill and compress forex reserves,” Chalasani added.

Reforms and Index Review

Amid these pressures, the government introduced foreign investment reforms on June 5. Measures included tax exemptions for foreign portfolio investors on government securities and expanded access to bond categories, such as green and long-dated instruments. These reforms were also timed to influence Bloomberg Index Services’ upcoming assessment of India’s inclusion in its Global Aggregate Index, a benchmark widely followed by developed-market investors.

Bloomberg previously delayed India’s entry in January, citing gaps in tax-processing systems and settlement infrastructure. Analysts estimate inclusion could generate up to $25 billion in passive inflows, though the outcome remains uncertain.