Bombay fall follows index revision

By Sanjeev Srivastava in Bombay

The Bombay stock exchange index shed 123 points to close at 4,068 on Friday as stocks tumbled on the back of Morgan Stanley Capital International (MSCI) reducing India's rating from 9.05% to 7.45% in its emerging markets index.

Sales of 8bn Rupees took place a week earlier

According to analysts. the fall would have been much greater - but for the fact that many of the foreign institutional investors (FIIs) had anticipated the changes in the MSCI index and notched up sales of roughly 8bn Rupees last week.

"The rating in many FII portfolios is thus already reduced to the changed MSCI index and the downside looks limited from here," says Mehul Desai of Rosy Blue Securities.

Slowdown fear

The downside may not be much - but many fund managers feel that with India's rating reduced, the flow of foreign investment may slow down even if there is no substantial outflow of money from the Indian markets.

This could keep the markets depressed and in a narrow trading zone until some positive news provides the trigger for a fresh rally.

Some funds are guided by the index - some not

According to market estimates, nearly 60% of FII investment decisions are guided by the MSCI index recommendations.

While India-specialised foreign funds do not often use the MSCI index as the sole benchmark for making investment decisions as they have their own research teams in place, a majority of the emerging market funds depend entirely on the MSCI index to make their allocations.

Index changes

A total of 14 scrips have been added to the MSCI index while 10 - including Wipro - have been deleted.

With this, the MSCI India index now comprises 71 companies representing 24 industries.

Most of the scrips added to the MSCI index are from the new economy sector including India media giant Zee Telefilms, telecom majors Global Telesystems and Himachal Futuristic, software firms like DSQ software, Software Solutions, Digital Equipment and Silverline Industires.

Two pharmaceutical companies - Sun Pharma and Pfizer - have also found their way into the revised India index.

The significance of the MSCI index can be appreciated by the market reaction to the stocks included and dropped from the new index.

While most of the new entrants on the revised index were trading higher even in a weak stock market on Friday, the Wipro scrip lost nearly 15% in the last two trading sessions.