India Drops to 4th in MSCI EM Index, Shocking 14% Decline
When I started tracking India’s weightages in global equity benchmarks a few years ago, I was quite sure discussion on our momentum could only trend one way, up. After all, India’s growth story scoreboard, expanding markets, and high domestic demand have taken us far. Yet what prompted me to pause, reflect, and reconsider some conventional thinking that we take for granted was the recent change in India’s MSCI Emerging Markets (EM) Index weight.
India’s actual weight in the MSCI EM Index is down sharply from nearly 21% in September 2024 to less than 14% as of January 2026. That’s quite a shift and one that has huge implications for foreign flows, relative performance, and the way global investors view growth prospects.
In this article, I explore the drivers behind India’s falling weight in the MSCI EM Index, some of the sectors that were hit hardest, as well as some of the structural impact arising from global technology and AI demand on emerging market benchmarks, along with potential long-term opportunities for patient investors willing to look past short-term index gyrations.
From Second Place to Fourth: What Changed?
Over the better part of the past decade, India has firmly ensconced itself as the second-largest constituent of the MSCI EM Index, a reflection of our burgeoning market capitalisation as well as relative outperformance. That was until the late 2024/early 2025 period when global investor attention shifted dramatically towards AI, semiconductors, and high-growth technology plays.
Today, India has slipped to fourth place, behind China (26.58%), Taiwan (21.04%), and South Korea (15.65%). The main reason? While India was steady, other markets, especially those deeply tied to AI and semiconductor demand, were explosive.
Cyclical vs. Structural Forces at Play
From interactions with portfolio managers and market analysts, it appears there is a broad consensus that India’s weight erosion is a function of cyclical as well as structural forces.
Cyclical Factors
These are market forces that can be reversed, and occasionally are.
- China’s Late-2024 Stimulus: A series of stimulus measures infused new life into China’s markets, squeezing India’s relative share.
- Foreign Outflows: Foreign institutional investors reduced net purchases in Indian equities, particularly in large caps.
- Rupee Depreciation: India’s market cap measured in USD terms suffered as the rupee weakened by over 6% against the dollar in 2025.
- Earnings Growth Divergence: Indian earnings have been solid but not spectacular compared to the tech-led growth seen in Taiwan and Korea, where markets rose over 90% and 115% respectively in USD terms between January 2024 and January 2026.
Structural Shifts: The AI and Semiconductor Story
Here’s where things get interesting. And while India dominates services, financials, and consumer sectors, the MSCI EM Index has been hypercharged by companies directly connected to AI output and semiconductors. These stocks are not only growing fast, but they’re also redefining global industrial cycles. In contrast, India’s largest export sectors, like IT services, are more beneficiaries of global demand than architects of the next technology frontier.
Sectoral Impact: Who Lost, and Who Didn’t
A closer look at which Indian sectors saw the biggest downward momentum shows that BFSI, IT services, and consumer staples bore the brunt of passive foreign flows. These industries had been benefiting from substantial index-linked investments over a long period of time, which meant that they were more sensitive to changes in the makeup of an index.
In relative terms, though, some sectors such as healthcare and certain industrials have shown strength. Stocks benefiting from domestic consumption remained popular among retail investors, helping to make up for outflows from institutional investors.
Global Markets Tell a Story Too
Returns adjusted for the dollar clearly show this divergence. Between January 2024 and January 2026, the Sensex rose about 4.6%, and the Nifty gained 7.6%, both in USD terms. Over the same period, China’s Shanghai Composite rose 46%, Taiwan’s index gained 96%, and South Korea’s Kospi advanced 116%. When global investors benchmark returns in USD, markets tied to high-growth sectors automatically dominate index composition.
Is This a Permanent Shift? Not Necessarily
A lot of analysis treats index weights as destiny. They’re not. Cyclical headwinds can reverse. Many global managers still maintain bullish long-term views on India due to its demographics, domestic consumption, and ongoing reforms. Index composition reflects today’s market structure, but long-term value creation in India could attract renewed foreign flows.
The AI Paradox, India’s Blindspot or Opportunity?
Yes, India doesn’t have large domestically listed semiconductor champions like Taiwan or Korea. But India excels in software, services, data engineering, and cloud adoption, all of which are foundational to AI growth. The opportunity lies not in replicating Taiwan’s foundries but in leading in AI applications that scale globally. India’s startup ecosystem, if leveraged with adequate public-market pathways, could eventually produce high-impact AI leaders.
Also Read: AI Boom in India: 3 Structural Wins Transforming Mid-Caps
What This Means for Individual Investors
While one implication for long-term investors is to chase index weights, the real story here is to gain exposure in companies with quality earnings power, potential for growth sector, and a lasting competitive advantage. Today, global investor appetite favours AI platforms, semiconductor hardware, and technology supply chains. India can still seek indirect benefits from software, services, and the adoption of niche tech.
Despite a decreasing index weight, India’s domestic growth thrust continues to be strong, supported by an emerging middle class, robust consumption spending, and policy help for capital formation.
Where I See the Next Wave
I see three areas worth watching:
- Attract domestic innovation platforms and scale startups into global relevance.
- Export of tech services, especially those driven by AI.
- The manufacturing upgrades, including semiconductors, are already coordinated with the government incentives.
India doesn’t need to copy Taiwan’s model; it has to build up using its own strengths.
Final Takeaway
India’s drop in the MSCI Emerging Markets Index is not a reflection of stagnation, but rather where global capital demand is clustering today. Emerging markets develop in line with technological, structural, and investor changes. Long-term investors can see this as an inflexion, not panic. India’s growth engine is intact, transforming, and full of potential.
Also Read: FII $2.44B Inflows Signal Caution Amid Market Revival
Disclaimer
This article is for informational purposes and does not constitute financial advice. Market conditions are subject to change at any time, and individual investors should seek financial advice regarding the appropriateness of investing in securities, including those mentioned here.
