India’s standing within global emerging market portfolios is undergoing a notable recalibration, with its weight in the MSCI Emerging Markets (EM) index declining to around 12 percent—levels last seen during the Covid period. The shift underscores a broader realignment in global capital flows, where investors are increasingly reallocating funds towards markets that have delivered stronger relative returns over the past year.

Since September 2024, Indian equities have experienced a phase of sustained volatility and relative underperformance when measured in dollar terms. Benchmark indices such as the Sensex and Nifty 50 have declined approximately 17.5 percent and 16 percent respectively over this period. This correction comes after a multi-year rally that had positioned India as one of the most overweight markets in global EM portfolios.

In contrast, several key Asian peers have witnessed a sharp resurgence. China’s Shanghai Composite has risen nearly 50 percent, Taiwan’s equity market has advanced 77 percent, and South Korea’s Kospi has surged an impressive 124 percent over the same timeframe. This divergence in performance has triggered a natural rebalancing by global institutional investors, particularly passive funds that track MSCI benchmarks and active managers seeking relative alpha.

The decline in India’s MSCI EM weight is not merely a statistical adjustment but reflects deeper structural and cyclical factors. Elevated valuations in Indian equities, coupled with earnings moderation in certain sectors and global risk-off sentiment at various intervals, have contributed to a cooling of foreign portfolio inflows. At the same time, policy support measures and cyclical recovery in China and export-driven momentum in Taiwan and South Korea have made these markets more attractive in the near term.

From a market mechanics standpoint, MSCI index weights are influenced by both market capitalisation changes and free-float adjustments. As competing markets deliver superior returns, their relative weights increase, automatically diluting India’s share even without large absolute outflows. However, the current trend also coincides with a shift in foreign institutional investor (FII) behavior, where incremental allocations are being diverted away from India.

This development carries meaningful implications for Indian markets. A lower weight in MSCI EM can translate into reduced passive inflows, as global funds benchmarked to the index adjust their allocations. While India remains a core structural story within emerging markets, near-term flow dynamics may remain volatile, particularly if relative performance continues to lag.