Synopsis: The MSCI Emerging Markets Index rebalancing in August, with the official announcement on August 13, is expected to influence HDFC Bank shares significantly. A potential reduction in foreign institutional investors' (FII) stake could double the bank's weight in the MSCI Standard Index, potentially bringing in up to $4 billion from passive funds.
The MSCI Emerging Markets Index rebalancing in August, with an official announcement on August 13, is expected to trigger pre-emptive price action.
HDFC Bank shares are anticipated to draw significant attention 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.
As of March 2024, FIIs hold a 55.54% stake in HDFC Bank, India's most valuable bank.
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 unfavorable outcome might cause the share price to decline to around Rs. 1,600, at which point domestic funds are expected to show increased interest.
The shareholding pattern for the quarter ending June 2024 is expected to be released this week. Anticipation ahead of this release is likely to drive price movements.
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 and 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.
In conclusion, the anticipated MSCI Emerging Markets Index rebalancing in August could significantly impact HDFC Bank shares, especially if a change in foreign institutional investors' stake leads to an increased weight in the MSCI Standard Index.
This potential shift could attract substantial capital inflows, driving the stock price higher.
However, if the shareholding pattern does not support the increase, the stock might decline, creating opportunities for domestic funds.
The outcome of this rebalancing and the forthcoming shareholding data will be crucial in determining the near-term trajectory of HDFC Bank shares.
