From Wall Street to Dalal Street: U.S. Pension Fund’s Shift Brings Billions to Indian Markets

The Federal Retirement Thrift Investment Board’s (FRTIB) decision to switch indexes from the MSCI EAFE to the MSCI ACWI IMI ex USA ex China index is expected to have a substantial impact on Indian equities. Here’s a detailed breakdown of this strategic move and its implications:

1. Overview of the Federal Retirement Thrift Investment Board:
   • The FRTIB manages assets worth approximately $600 billion, making it a significant player in U.S. pension funds.
   • As of October 31, 2023, the FRTIB had invested around $68 billion in the International Stock Index Investment Fund​​.
2. Details of the Index Transition:
   • The shift from MSCI EAFE index to MSCI ACWI ex USA and ex China marks a focus on emerging market equities excluding China and Russia.
   • The MSCI ACWI ex USA and ex China index includes a mix of developed and emerging markets​​.
3. Expected Impact on Indian Equities:
   • The previous MSCI EAFE index did not include India, covering 21 developed markets across Europe, Asia, Australia, and the Far East.
   • With the transition, Indian equities are likely to gain prominence in the new index, attracting significant capital inflows​​.
4. Projected Inflow into Indian Equities:
   • Analysts anticipate an influx of approximately $3.6 billion into Indian equities as a result of the FRTIB’s index switch.
   • This move, commencing in 2024, is expected to significantly alter the weightage of Indian shares, drawing fresh funds to the country​​.
5. Global Equity Reshuffling:
   • The decision by the FRTIB is part of a larger $28 billion global equity reshuffling, signaling a shift in international investment strategies​​.
6. Context of Foreign Portfolio Investment:
   • Prior to this move, foreign portfolio investors had already injected around ₹96,340 crore into Indian equities in the current calendar year, contributing to record highs of benchmark indices like Sensex and Nifty​​.
7. Additional Foreign Institutional Investors’ Money:
   • Indian stocks are expected to receive about $1.5 billion from foreign institutional investors due to an increase in India’s weightage in the MSCI Standard Index.
   • Another $3.8 billion is likely to be invested in Indian stocks as a result of the FRTIB’s switch to a new MSCI index that includes India​​.
8. Specific Indian Stocks Included in the MSCI Index:
   • Nine new Indian stocks have been added to the MSCI Global Standard index as part of its quarterly review and rebalancing, which includes major companies like IndusInd Bank, Suzlon Energy, and Tata Motors​​.
9. Further Details on the U.S. Pension Fund’s Index Change:
   • The Thrift Savings Plan’s International Stock Index Investment Fund will transition to the MSCI All Country World ex USA ex China ex Hong Kong Investable Market Index from 2024.
   • This change is expected to more than double the number of countries included in the fund and will change the number of equities by 700%​​.
10. Operational Complexity in Emerging Markets:
    • Recent events such as investment restrictions and sanctions have increased the complexity of investing in emerging markets.
    • Japan holds the highest representation in the MSCI All Country World ex USA ex China ex Hong Kong Investable Market Index, with India in the seventh spot with a weight of 5.3%​​.

In summary, the FRTIB’s decision to switch its index benchmark to one that includes Indian equities is expected to lead to significant capital inflows into the Indian stock market, altering the landscape of international investments and potentially boosting the Indian economy.