MSCI Rebalancing Explained: Why Nifty, Sensex And Major Stocks Crashed In Late Trade

Indian equity markets ended sharply lower on Friday and closed the month in the red as investors turned cautious amid uncertainty around a possible U.S.-Iran peace deal and the impact of MSCI rebalancing on foreign fund flows. The Nifty 50 dropped 1.5% to close at 23,547.75, while the BSE Sensex fell 1.44% to settle at 74,775.74. The decline also pushed both benchmark indices into monthly losses, with the Nifty down 1.9% and the Sensex slipping 2.8% for May. Selling pressure intensified during the final half hour of trade after the latest MSCI rebalancing changes officially came into effect. Analysts said the combination of global uncertainty, high crude oil prices and index-related selling weighed heavily on investor sentiment.

Markets tumble sharply as MSCI rebalancing triggers late sell-off

The sharpest fall in Friday’s session came during the final minutes of trading as investors reacted to the latest MSCI rebalancing exercise. According to IIFL Capital, India’s weight in the MSCI Emerging Markets Index, which had climbed to nearly 20% in July 2024, is now expected to fall to around 11.2% after the latest changes.

The MSCI rebalancing impact added pressure to an already weak market environment. The benchmark Nifty index had earlier fallen 11.3% in March before recovering 7.5% in April. However, uncertainty linked to global geopolitical tensions again pushed investors towards profit booking in May.

Arun Malhotra, founder and fund manager at CapGrow Capital, said, “We are unlikely to see a consistent rise in Indian stocks unless the uncertainty over U.S.-Iran conflict is clearly behind us.”

What is MSCI rebalancing and why does it matter to markets?

MSCI Rebalancing refers to a periodic exercise involving changes in stock compositions and their respective weightages in the MSCI index so as to ensure that the index better reflects the present market situation. It involves additions of new firms, deletions of weak firms and changes in weightages on the basis of market capitalisation, liquidity and foreign ownership restrictions.

As a result of MSCI rebalancing, firms that have experienced significant growth might be added in the index while weak firms will be deleted from the list. Changes in the weightages of firms would depend on free-floating shares of such firms that are open for trading in the market. Foreign ownership requirements may also influence weightages.

MSCI Rebalancing will have a direct impact on stocks inasmuch as global funds and exchange-traded funds following the MSCI Index must also conduct their own rebalancing operations according to changes made in the index. This will involve buying or selling stocks sharply and creating volatility in the market.

Oil prices, foreign flows and global uncertainty weigh on investors

Analysts said elevated oil prices and weak global technology-related momentum continued to keep Indian equities under pressure. Although Brent crude futures declined 19% during May, prices still remained 27.3% higher than levels seen before the Iran conflict. India, being the world’s third-largest crude importer, remains sensitive to rising oil prices.

The MSCI rebalancing also raised concerns about foreign institutional investor flows into Indian equities. Market experts said global funds tracking MSCI indices often adjust their portfolios immediately after such changes, leading to sudden buying or selling pressure in certain stocks.

Ten out of 16 major sectoral indices ended the month lower. Heavyweight financial stocks fell 1.2%, while IT stocks slipped 0.9%. Reliance Industries dropped 7.7% during the month, adding to the broader market weakness.

Broader markets outperform despite weakness in large-cap stocks

Despite the weakness in benchmark indices, broader markets showed relative strength. The small-cap index rose 0.7% during May, while the mid-cap index gained 3.2% on optimism around quarterly earnings and domestic investor participation.

Shares of ONGC fell by 11.4 percent due to profit taking after the company’s stocks witnessed gains of 25 percent in the past four months. There were worries over possible delays in some major projects of the company.

ITC shares dropped 8.9% after analysts warned that recent cigarette price hikes could hurt sales volumes during June.

(with inputs from Reuters)

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