HOW THE BLACK FRIDAY EFFECT PLAYED OUT ON 29-MAY?

HOW THE BLACK FRIDAY EFFECT PLAYED OUT ON 29-MAY?

On Friday, 29-May; the last day of trading for the month, the Indian markets crashed sharply in the last one hour. With about an hour to go, the Sensex was in the positive by 400 points. In the last 1 hour, the Sensex lost over 1,500 points to close with losses of 1,192 points. The selling was perceptible as most of the large caps sold off heavily. That was evident in the price damage to the large cap stocks in the last hour. Here is FPI / DII activity on 29-May.

There were several macro factors that triggered this selling. Firstly, the IMD had downgraded the monsoons from 92% to 90% of long period average (LPA). That hints at a deeper drought. Secondly, the situation in the Middle East continued to fester, with no signs of any rapprochement in sight. Above all, there was the big MSCI rebalancing that happened on Friday, which triggered the selling. The numbers show net selling with volumes by FPIs.

MSCI REVAMP – HOW AND WHY IT HAPPENED?

There are few basic things to understand about the MSCI revamp. Firstly, here the reference is specifically to the MSCI EM Index, which is a global allocation benchmark for funds investing in emerging markets like India. The definition of emerging markets includes several large economies across Asia and Latin America like China, India, Taiwan, South Korea, Thailand, Saudi Arabia, Brazil, Mexico etc. The MSCI Index is based on the free float market cap weighting methodology. That means if a company with a high free float increases in market value, it gets more weight in the index.

Secondly, the MSCI revamp had already been announced on 13-May 2026, so the details of the revamp were already known. These changes were only implemented on 29-May 2026, so there was no element of surprise in the news. Thirdly, the reduction in weightage of India was marginal; from 12.4% prior to the revamp, to 12.3% post the revamp. However, this does lead to a change in weight of stocks in the index, and so passive funds (index funds and index ETFs) pegged to the MSCI EM index revamp their portfolios accordingly. That is what we got to see on 29-May 2026.

MSCI REVAMP EFFECT AND QUANTUM OF BUYING / SELLING

The MSCI revamp impacts stock values in 4 different ways. There are stock additions, stock weight enhancements, stock exclusions, and stock weight reductions. The net effect of these 4 factors determines the overall buying / selling due to MSCI revamp. Here are details.

The total impact of the MSCI revamp on flows on 29-May was to the tune of $(2,261) million. When converted to Indian rupees, that roughly translates into ₹21,706 crore, which approximately corresponds with the net FPI selling seen on 29-May. However, the big question is if the net selling was around $2.26 billion then why were the gross FPI volumes on 29-May as high as $20.9 billion? There are 3 reasons for this high activity level.

While the impact on passive funds is what is estimated in the above table, even active funds report their holdings in EM stocks based on the MSCI weight. These may be reported as underweight or overweight, so there is an adjustment impact.

Since the weight changes were known on 13-May and were to be effective on 29-May, many FPIs do take trading positions in stocks based on their likely inclusion, exclusion or the expected weight changes. This is more common in highly liquid stocks.

Thirdly, most FPIs hold cash-futures arbitrage position books in the Indian market. The volatility on the adjustment day gives them the opportunity to unwind arbitrage positions at substantial premium compression. That was also evident.

The gross volume of $20.9 billion by FPIs on 29-May was a sum total of all these items.

INDIA’S POSITION IN THE MSCI EM INDEX

Has India’s position in the MSCI EM index been waning? The answer is “Yes”. From a peak of around 20.8% in September 2024 to just around 12.3% as of date, the India weight in the MSCI EM index has fallen by 850 basis points since the FPI selling started. This was also matched by another big trend of FPI money gravitating towards AI-related stocks.

The massive rise of Taiwan and South Korea in the MSCI EM index weight was driven by AI-led stocks like TSMC, SK Hynix, and Samsung Electronics. That is one area where India needs to seriously look at the narrative it sells to the FPIs!