HDFC Bank shares are expected to attract significant attention in the near term due to a potential change in their weight in the MSCI Standard Index. Analysts estimate that a 50 basis points decline in foreign institutional investors’ (FII) stake in the June 2024 quarter could double the bank’s weight in the index, potentially resulting in inflows of up to $4 billion from passive funds.
Currently, FIIs hold a 55.54% stake in HDFC Bank, India’s most valuable bank, as of March 2024. If this stake falls below 55%, the FII headroom requirement would increase to 25%, causing the adjustment factor to move from half to full. This change could boost HDFC Bank’s weight in the MSCI Standard Index from 3.8% to approximately 7.2%-7.5%, leading to substantial capital inflows.
If the shareholding supports a weight increase, HDFC Bank’s stock could see a further 10-15% rise until the official announcement in August. Conversely, an unfavourable outcome might cause the share price to decline to around Rs 1,600, at which point domestic funds are expected to show increased interest.
Shareholding pattern key
The shareholding pattern for the quarter ending June 2024 is expected to be released this week. The MSCI Emerging Markets (EM) Index rebalancing is scheduled for August, with the official announcement on August 13. Anticipation is likely to drive price movements ahead of the release of the shareholding data.
HDFC Bank shares have surged nearly 16% over the past three months, outperforming the benchmark Sensex’s 7.5% rise. The bank narrowly missed the opportunity to double its MSCI weight in the March quarter due to a slight shortfall in FII holdings required by MSCI’s criteria.
The merger between HDFC Bank and HDFC last year should have resulted in a higher combined weight in the MSCI Index. However, MSCI maintained an adjustment factor of 0.5 instead of 1, which would have allowed greater foreign investor headroom. This factor adjustment would have enabled a 25% foreign stake in the bank.
In a similar scenario, Kotak Mahindra Bank experienced an increase in its foreign headroom from 22.38% to 25.05% after a decline in foreign holding, leading to a factor adjustment from 0.50 to 1. This change resulted in an inflow of over $700 million and a subsequent stock rally.
HDFC Bank has been an underperformer for most of the year but has recently gained momentum. In the past month alone, the bank’s shares have risen over 11%, with a 16% increase over three months.
Domestic funds have been consistent buyers of HDFC Bank, and FII flows into India have increased, potentially indicating purchases of private banks, particularly HDFC Bank.
