HDFC Bank stock slips 3% as MSCI's lower-than-expected weight change disappoints investors

HDFC Bank's shares took a nearly 3 percent dip by trading at Rs 1,614 apiece on August 13. The drop came after investors expressed disappointment over MSCI Global Standard Index's decision to increase the bank's weightage in two stages instead of one and lower-than-expected weight change.

The first adjustment, raising the foreign inclusion factor (FIF) from 0.37 to 0.56, is set for September 2, following the current rebalancing. The second adjustment, bumping the FIF from 0.75 to 1, is slated for November.

The Foreign Inclusion Factor (FIF) in MSCI indices represents the proportion of shares available to international investors in public equity markets. An FIF of 0.56 for HDFC Bank indicates that 56 percent of its shares are open to foreign investment within the index. The final adjustment, raising the factor to 1, will occur in November, contingent on HDFC Bank’s FPI headroom staying above 20 percent.

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Though MSCI increased HDFC Bank's weightage, leading to $1.8 billion inflow, but it took place with a low adjustment factor. Low adjustment factor refers to reduced weighting used by MSCI when calculating a company's inclusion in an index.

June’s shareholding data revealed that foreign ownership in HDFC Bank stood at 54.83 percent, qualifying it for the increased MSCI weight during the upcoming August 2024 rebalancing. This level of foreign ownership allows for more than 25 percent ‘foreign room’ in HDFC Bank, a requirement for MSCI to consider the stock at its full market-cap weight. Some market participants predict this inclusion could draw in MSCI inflows of up to $5 billion.

Analysts at Nuvama had earlier expected inflows of about $3.2 billion-$4 billion into HDFC Bank after the MSCI revision. However, they now see $1.8 billion in inflows after the first change. Details of the second move are expected later this year.

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