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Strong fundamentals have helped India pip China in the MSCI EM Investable Market Index (IMI) to become the largest weight. The world’s fastest-growing economy is also set to surpass China as the top weight in the broader MSCI Emerging Markets index too. 

The MSCI Emerging Markets IMI captures large, mid and small cap representation across 24 Emerging Markets (EM) countries. With 3,355 constituents, the index covers approximately 99 per cent of the free float-adjusted market capitalisation in each country.

Global brokerage Morgan Stanley said in a note that the rising index weight could be a sign of exuberance or “due to fundamental factors such as improving free-float and rising relative earnings of India Inc.”

"Fundamental factors definitely apply to India and, to that extent, India's new found position in EM is not a worry," the brokerage said, adding that India remains its top preference in the EM region, and its second choice in the Asia-Pacific.

According to the note, there are several potential triggers for a market correction but are not significant enough to apply the brakes on the bull run in Indian equities. India's weight in the EM index could have some more distance to travel before it peaks.

Market analysts said that the Indian economy continues to do well and the macros are improving as indicated by the 47 per cent growth in foreign direct investment (FDI) in the April-June period in FY25, and the steady decline in Brent crude prices to below $73 now.

There is financial stability and the growth momentum in the economy continues to be strong. Foreign Portfolio Investors (FPI) have pumped over Rs 1 lakh crore into the Indian debt market in 2024 so far due to the country’s inclusion in JP Morgan’s Emerging Market (EM) Government Bond Indices in June this year.

There are many other reasons for the sharp rise in the foreign inflow in the Indian debt market like a high growth rate, stable government, reduction in inflation and financial discipline by the government.