India's newly implemented Closing Auction Session (CAS) is facing a crucial test today, August 31, as a significant MSCI rebalancing takes effect. This rebalancing is expected to trigger substantial passive fund flows, estimated at around $1.5 billion, into the Indian market. The changes, effective after the market closes, will impact various Indian stocks as passive funds adjust their portfolios to align with the revised MSCI indices. Niharika Tripathi, head of research at Wealthy.in, highlighted the concern that the closing auction might struggle to absorb large institutional orders without causing excessive price dislocation or liquidity stress, especially given the concentration of orders from passive funds.
The volatility of the new closing auction system has already been a point of concern for market participants. The Nifty's indicative price dropped from negative 0.24% to negative 1.4% on Tuesday, and the BSE derivatives turnover hit an 11-month low on Thursday, with its indicative close briefly falling more than 3% during the closing auction. For example, a Bankex put option saw a nearly 4,000% jump from $1.7 to $68.55 within minutes during Thursday's auction before crashing back to zero. Maurya Ghelani, a derivatives strategist at Kai Securities, noted that the system compresses an entire trading session's worth of risk into a few minutes, leaving little time to react for those on the wrong side of a trade.
The MSCI rebalancing involves the addition of four Indian companies to its Global Standard index: Laurus Labs, Lenskart, Adani Energy Solutions, and Groww. These additions are projected to bring significant inflows, with Laurus Labs expecting $598 million, Lenskart $352 million, Adani Energy Solutions $310 million, and Groww $256 million. Conversely, three companies will be removed from the index: Balkrishna Industries, SBI Cards, and Astral, which are estimated to see outflows of $169 million, $143 million, and $138 million respectively. India's overall weightage in the global standard index is set to increase slightly from 11.8% to 11.9%, and the number of Indian constituents will rise to 166 from 165.
Beyond new inclusions and exclusions, the rebalancing also recalibrates weights for existing index members. Eternal is expected to attract the largest incremental passive inflow at approximately $674 million due to an increased weight. Adani Enterprises and Adani Ports are also projected to receive inflows of around $202 million and $77 million, respectively. On the other hand, some major constituents will face outflows, with Reliance Industries estimated to see roughly $523 million in outflows, and Jio Financial Services potentially experiencing $61 million in outflows. The combined total inflows from weight increases are estimated at $1.050 billion, while total outflows from weight reductions are projected at $653 million. MSCI's Small Cap index also saw additions and deletions, with 12 companies added and 19 removed.
