HDFC Bank Set to Rebound as MSCI Weight Increases

HDFC Bank, which has been underperforming lately, might see a turnaround due to a potential increase in its weight in the MSCI India Index. This adjustment could lead to significant foreign investments.

HDFC Bank’s merger with HDFC Ltd. was completed, creating a substantial combined entity. With the merger, the foreign shareholding in the combined entity is around 60-62%. This high level of foreign ownership positions HDFC Bank for an increased weight in the MSCI index, which tracks performance of large and mid-cap segments of the Indian market.

The MSCI index weight could potentially double from 3.93% to 7.9%, provided the foreign room—the proportion of shares available to foreign investors—reaches 25%. As of the March quarter, the foreign room was just shy of this threshold at 24.94% .

If HDFC Bank achieves this increase, it could attract approximately $5 billion in foreign inflows. This potential influx is expected to drive significant interest and investment in the bank’s stock. Domestic investor sentiment has already been strong, with delivery-based buying reaching a four-month high in June, and the stock price rising in response.

Moreover, HDFC Bank is set to replace HDFC Ltd. in various global indices like the MSCI Global Standard Index and FTSE All-World Index from mid-July. This transition is expected to further boost the stock’s visibility and attractiveness to international investors.

The positive outlook is also supported by short covering activities, where traders buying back previously shorted shares have contributed to recent price increases. Analysts predict that the stock could soon test its previous high levels if the current momentum continues.

Overall, the expected increase in MSCI weight, coupled with strong investor interest, suggests that HDFC Bank’s period of underperformance might be ending, paving the way for potential growth and higher stock valuations in the near future.