Steady nominal GDP growth will gradually boost India's weight in MSCI EM index, says Morris of BNP Paribas AMC

Drawing a comparison between China and India in the emerging markets, Morris said that, unlike China, which is more export-oriented, India’s growth is powered by domestic consumption, services, and a rising middle class, making it a potential beacon of stability and growth in a volatile global environment.  

Edited excerpts:

How would you describe the current global sentiment? Do you think the tariff wars are behind us now?

We will know more in 90 days. Right now, the market seems to appreciate that we have moved into the negotiation phase. The original reciprocal tariffs were never meant to stay high, they were a way to get attention and bring countries to the table, which worked. We have already seen reductions and deals like the one with UK are a start, with others in progress. 

The US holds a strong negotiating position, as it is the world’s largest market and a key destination for global exports. While India is less export-dependent, the leverage still matters. Ideally, we will see a positive outcome: slightly higher US tariffs, but lower ones elsewhere. We will have to wait and see how it plays out.

Also read: Andy Mukherjee: Importers hit by Trump tariffs could turn to ‘glocal banks’

With tensions easing, do you think the expected near-term rate cut might now be pushed back?

The Fed (US Federal Reserve) made it clear at the last meeting that inflation is still a concern. Since then, one of the rate cuts that markets had priced in has effectively been pulled back. The most recent CPI data did not yet show much pressure on inflation, so now everyone is waiting to see what happens next month. At the same time, the Fed is also watching growth closely.

There is a parallel here to the pandemic. Back then, most forecasts for growth and inflation turned out to be wrong, not because the analysts were off, but because we were in completely uncharted territory. No model could really capture what was happening. It feels similar now. We are in a situation we have not seen before, so we are still flying blind in some ways. Everything depends on how the data plays out, both for growth and inflation and the Fed’s response will follow from that. I could make a prediction, but honestly, confidence in any forecast is low right now. It is a very volatile, very data-dependent environment.

Where is India placed among global peers in the investment landscape?

India has emerged as a top global FDI destination, with inflows rising from $36 billion in FY14 to over $80 billion in FY25. In a multi-polar world and constantly changing geopolitical landscape, India appears to be on the right side of the global bloc, with the potential to benefit from global supply chain disruptions, offering a credible alternative to China. Structural reforms like Make in India, PLI (Production Linked Incentive) schemes, and Ease of Doing Business have strengthened its appeal, positioning India as a long-term investment hub. With a young workforce, growing infrastructure and stable macroeconomic outlook, India is well-placed to attract sustained global capital and play a pivotal role in the evolving multipolar world economy. 

Also read: RBI rate cuts, fiscal support likely to aid FY26 earnings recovery: Sanjay Chawla of Baroda BNP Paribas MF

FIIs seem to have made a comeback. Do you think these foreign inflows into India would continue? 

Yes, FIIs (foreign institutional investors) have made a comeback in April, supported by India’s robust macroeconomic backdrop, easing oil prices, and equity market valuations that have become more reasonable. The recent softness in the US dollar index has also contributed to a shift in global capital flows toward emerging markets, with India emerging as a key beneficiary. The Reserve Bank of India has played a crucial role by building a strong foreign exchange reserve buffer, which helps mitigate currency volatility. 

We are in a situation we have not seen before, so we are still flying blind in some ways. Everything depends on how the data plays out, both for growth and inflation and the Fed’s response. It is a very volatile, very data-dependent environment. With a young workforce, growing infrastructure and stable macroeconomic outlook, India is well-placed to attract sustained foreign investor flows. 

Indian stock markets’ reduced correlation with global markets further translates into superior diversification benefits for foreign investors, which will help India get its rightful share of foreign capital flows. 

What is your region-wise stance?

What is different today is that, honestly, we don’t have a clear geographical overweight. Broadly speaking, we still like equities, but it is not obvious which markets outside the US are going to outperform. So we are neutral geographically right now. Normally, we would have a regional tilt, but this is one of those odd moments where it is unclear which markets will lead, and that is partly because there is no extreme divergence in valuations and earnings growth expectations across markets. 

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In the emerging market basket, how do you look at India versus China?

India stands out among emerging markets due to its domestically driven economy, which offers resilience amid global uncertainty. Unlike China, which is more export-oriented, India’s growth is powered by domestic consumption, services and a rising middle class. This makes India a potential beacon of stability and growth in a volatile global environment.  

If India continues to grow its nominal GDP at a low double-digit rate, it will support a gradual increase in its weight in the MSCI Emerging Markets Index. India is already the second largest weight in this index and further weight increase will help attract more benchmark funds to the country.  

The gains in China’s equity markets have primarily been driven by a few numbers of stocks in the technology sector; there is a similar concentration as seen in the US ‘Magnificent 7’ stocks. The returns of these stocks in China reflect the talent and innovation we saw in the DeepSeek announcement, as well as the reaffirmation of the government’s support for the sector. We believe the outlook here is more encouraging, while the rest of the market suffers both under the threat of tariffs as well as the weak domestic demand environment.

Let’s shift to asset classes like gold and silver that have already seen a strong run-up. Do you think it might be time to reduce exposure to precious metals?

After the very good performance, we have moved back to neutral on precious metals. We have already seen gold prices pull back a bit as geopolitical tensions have eased, which makes sense. 

But looking ahead, there are still two key drivers supporting gold. 

First, some central banks have been reallocating from US Treasuries into gold, something we expect to continue, which should support prices over the medium term. Second, with the ongoing uncertainty around US policy, gold continues to serve as a hedge against unexpected events. So while short-term volatility is expected, the medium-term outlook remains positive.

How do you see the dollar moving forward, now that tensions between the two giants are easing?

Despite expectations for Fed rates to stay higher, which would normally support a stronger dollar, we have seen it weaken over the past month or so. We think that has been mainly driven by fund flows, with foreign investors reallocating some of their portfolios out of the US into other markets. As we have said before, we are neutral on where exactly that money is heading. The key question now is whether that reallocation has mostly played out. While it is hard to predict, we could see some stabilisation in the dollar going forward.