The global artificial intelligence (AI) investment boom is changing the dynamics of capital flows in emerging markets, with India now falling out of the top tier of the widely followed MSCI Emerging Markets (EM) Index for the first time in at least 26 years. The development follows greater flow of capital into Taiwan, South Korea, and China, among other markets, into semiconductor and AI-related firms by international investors.

Key Highlights

• AI-driven semiconductor rally pushes Indian companies out of MSCI Emerging Markets Index top rankings.
• India's benchmark weight falls to six-year low amid shifting global investment flows.

No Indian Company in MSCI EM Top 10

This is the first time since at least 2000 that none of the 10 biggest Indian stocks are part of the MSCI Emerging Markets Index. HDFC Bank and Reliance Industries, India's two biggest players in the benchmark, have fallen to 11th and 12th rankings, respectively, from seventh and eighth, respectively, earlier this year.

The overall weightage of India in the MSCI EM Index has fallen to 10.87%, which is the lowest since 2018 and is down by almost 50% from the peak value in 2024. The move is emblematic of the rising value of stocks tied to artificial intelligence, especially semiconductor companies that have drawn an inordinate amount of investment capital around the world.

Also Read: India Loses Global Top 100 Market Cap Spot Amid Equity Slide

Why the MSCI Ranking Matters

The MSCI Emerging Markets Index is among the world's leading indexes for emerging-market stocks. Passive funds tracking the index directly control more than $700 billion, and total assets benchmarked to MSCI's emerging-market indices are over $1.8 trillion. Changes in country weights can therefore influence portfolio allocations across global institutional investors.

When a country's weight declines, passive funds are required to reduce holdings proportionately during periodic rebalancing exercises. At the same time, active fund managers face less pressure to maintain overweight positions in that market, potentially reducing future capital inflows.

AI Boom Driving Global Capital Rotation

The primary reason behind India's decline is the extraordinary rally in AI and semiconductor stocks. Companies linked to AI infrastructure have significantly outperformed traditional sectors, helping South Korea and Taiwan capture a larger share of the benchmark. AI-focused stocks now account for a substantial portion of MSCI EM's overall weighting, increasing concentration within the index.

Analysts note that while India's long-term economic fundamentals remain strong, the country lacks large-scale listed AI and semiconductor champions that have become major beneficiaries of the current global investment cycle.

Additional Pressure from Market Flows

The ranking change comes amid weaker foreign investor sentiment toward emerging markets. Foreign investors withdrew billions of dollars from emerging-market equities in May, with India among the markets witnessing notable outflows. Rising oil prices, geopolitical tensions and concerns over global growth have also weighed on investor appetite.

Domestic equity mutual fund inflows have also moderated in recent months, adding to concerns about liquidity absorption as new equity issuances continue to rise. However, several market experts believe India’s long-term growth story remains intact despite near-term pressure on valuations and benchmark weightings.

Government Efforts to Attract Capital

To strengthen capital inflows and support financial markets, the government and regulators have recently introduced measures aimed at improving foreign investor participation, easing access to debt markets, and enhancing foreign currency inflows. Market participants are also closely watching India's prospects for inclusion in additional global bond indices, which could potentially attract significant passive investments in the coming years.

While India's exit from the MSCI EM top 10 marks a symbolic setback, analysts view it more as a reflection of the current AI-driven investment cycle than a deterioration in the country's long-term economic fundamentals.