A few years ago, news of MSCI increasing India’s weight in the Emerging Market (EM) Index would have sent Indian markets soaring. Today, such announcements barely cause a stir. Recent reports suggest MSCI might raise India’s EM index weight to over 20 per cent, potentially injecting an additional $3 billion. However, the news has been met with a collective shrug by the markets.

Index Weighting No Longer a Big Deal

The reason for this indifference is India’s growing self-reliance. Systematic Investment Plan (SIP) collections now exceed ₹23,000 crore monthly. Combined with other fund investments and direct equity investments by domestic investors, a $3 billion influx from MSCI feels insignificant. LIC’s plan to invest ₹1.30 lakh crore – over five times MSCI’s potential annual contribution – further highlights this shift. Indian markets’ reliance on foreign investors is waning, thanks to a burgeoning domestic investor base. Foreign holdings are at a 12-year low, and the gap between foreign and domestic fund holdings is narrowing. Domestic funds might soon outstrip foreign portfolio investors (FPIs) in market influence.

Domestic Investors at the Helm

Despite the muted market reaction, India’s increased MSCI EM weight is symbolically significant. India’s gap with current EM leader, China, is now less than 400 basis points. Since 2021, the MSCI India index has jumped 84 per cent, while the MSCI China index has plummeted nearly 50 per cent. This shift is partly due to government and SEBI efforts to attract foreign investors. SEBI’s relaxation of foreign ownership limits has boosted Indian market appeal. The number of Indian companies in the MSCI India index has surged from 64 in 2014 to over 150. Conversely, recent updates show 60 companies removed from the China index.

Digital Payments Boom, Hidden Dangers

While MSCI index changes may not dramatically impact Indian markets, they remain headline worthy, reflecting India’s growing global economic stature. Meanwhile, the rise of digital payments, exemplified by Navi’s partnership with Karnataka Bank for credit lines on UPI, brings both convenience and new risks. UPI credit transactions are nearing ₹10,000 crore monthly, showcasing rapid adoption. However, RBI Deputy Governor Swaminathan J. warns that this 24/7 availability of online and mobile banking increases vulnerabilities, potentially accelerating bank runs and liquidity crises.

RBI Sounds a Risk Alarm

Speaking at an international conference, the deputy governor highlighted that digital platforms can amplify financial instability by disseminating adverse information and triggering coordinated financial behaviour. He emphasised the need for financial institutions to reassess crisis preparedness and invest continuously in IT systems to handle peak loads and cyber threats. Cyberattacks on the financial sector, a prime target, pose significant risks. The increasing reliance on third parties and the growth of fintech also demand vigilant regulatory oversight to balance innovation with financial stability.

Balancing Innovation with Vigilance

The interconnected nature of the global financial system, amplified by digital technology, means risks are no longer confined by national borders. A disruption in one area can rapidly spread, affecting multiple entities and jurisdictions. Therefore, international cooperation and robust regulatory frameworks are essential to manage these systemic risks effectively.

Will India’s digital payments revolution maintain its momentum without triggering unforeseen financial instability? Proactive regulatory measures and continuous investment in robust IT infrastructure will be crucial to navigate this evolving landscape and ensure the benefits of digital finance are realised without compromising financial security.