HDFC’s potential weight gain in MSCI index may bring $4-b inflows

"If FIIs reduce their holding from 55.50% to below 55%, there could be a significant weight change from 3.8% to 7.2% to 7.5%, potentially leading to inflows of $3.2 billion to $4 billion," said Abhilash Pagaria, head - Nuvama Alternative & Quantitative Research.

ETMarkets.com

HDFC Bank's shareholding pattern for the quarter ended June 2024 is expected this week. The forthcoming MSCI EM will be in August, with the official announcement on August 13. However, price action is likely to occur pre-emptively as speculation builds ahead of the release of the shareholding data.

shares have rallied nearly 16% in the last three months compared to a 7.5% rise in the benchmark .

HDFC Bank missed out on the prospect of doubling the MSCI weight by a whisker in the March quarter. Overseas investors' stake in HDFC Bank fell in the March quarter, but just short of index provider MSCI's requirements to increase the stock's weight on the index.

Following the merger of HDFC Bank and HDFC last year, the combined entity's total weight in the should have been higher, considering the total free float capitalisation. HDFC had a weight of 6.74% in the MSCI index while HDFC Bank had around 3-5%. However, MSCI opted to maintain an adjustment factor of 0.5 instead of 1. An adjustment factor of 1 will allow foreign investors headroom to buy at least a 25% stake in the bank.

In the March quarter of the previous year, the foreign holding of Kotak Mahindra Bank experienced a decline of 1.47%, leading to an increase in foreign headroom from 22.38% to 25.05%. Subsequently, MSCI adjusted its factor from 0.50 to 1, resulting in an inflow of over $700 million. After declining 2% in the year until April 2023, the stock witnessed a robust rally of over 12% within a month following the adjustment factor change.