With a US$3 trillion market capitalisation, India’s stock market is the eighth largest in the world. And it’s through benchmarks such as the S&P BSE Sensex and the Nifty 50 that investors make sense of an otherwise sprawling and complex market.

Therein lies the power of stock indices.

Another such benchmark that global funds closely track to decide which Indian stocks to invest in is the 28-year-old MSCI India Index. That’s why a change to the list of companies on it can have big implications.

By the time three Adani Group stocks were added to the MSCI India Index in May, there had already been questions about their gravity-defying rally during the pandemic.

Adani Total Gas, Adani Enterprises, and Adani Transmission had seen their shares rise between 6X and 13X in the preceding 12 months.

But the surge, including in other Adani Group companies, did not have so much to do with their businesses as with the fact that a smaller percentage of their shares was available for trading than on paper. In Adani Total’s Adani Total’s The Ken Hype in the Adani Total Gas pipe Read more case, it was as low as 5%. So, in effect, the supply of shares not being able to meet the demand drove the bull run in Adani stocks.

It’s for this reason that mutual funds have mostly stayed away stayed away Beyond the First Order The rise and fall of Adani stocks had little to do with their business Read more from Adani Group companies, which only makes the stocks’ entry into the MSCI India Index more striking. “When Adani companies become part of indices, you question the rationale of these indices,” says a senior executive with a large mutual fund house. They and several others The Ken spoke to for the story requested anonymity since they did not want to be seen publicly commenting on index providers.

Inclusion in the MSCI India Index could mean hundreds of millions of dollars of foreign inflows into a stock.

NSE Indices and Asia Index are the country’s largest index providers. The former is an arm of the National Stock Exchange of India ( NSE NSE The Ken How India’s National Stock Exchange turned from solution to problem Read more ), while the latter is a 50:50 joint venture between NSE rival BSE and S&P Dow Jones Indices (DJI). The two providers own and manage India’s two most popular benchmark indices—the Nifty 50 and the S&P BSE Sensex, respectively.