Overseas investors’ stake in the bank fell in the March quarter but this fell short of index provider MSCI’s requirements to increase the stock’s weight on the index.
With the reduction in FPIs’ stake, foreign investor headroom in the bank has risen to 24.95%, slightly lower than the MSCI requirements of 25%.
The foreign holding in HDFC Bank now stands at 55.54%, said Abhilash Pagaria, head of Nuvama Alternative Research.
An increase in a stock’s weight on MSCI indices would result in global exchange-traded funds (ETFs), whose portfolios mimic these indices, making fresh purchases.
Following the merger of HDFC Bank with parent HDFC, the combined entity’s total weight in the MSCI index should have been higher, considering the total free float capitalisation.
However, MSCI opted to maintain an adjustment factor of 0.5 instead of 1. This implies that foreign investors should have headroom to buy at least a 25% stake in the bank. This can happen only when existing foreign investors further sell their stake in the lender.”With the potential for further selling in this quarter, there may be a possibility of a weight-up adjustment in the August review,” said Pagaria.
The stock, which declined nearly 9% in the last three months, gained over 3% to close at ₹1,527.90 after better-than-expected deposit growth in the March quarter.
“The stock is trading near its multi-year lows, and don’t expect sharp correction as very little is built in from a weight-up perspective and declines should be used as an opportunity to go long,” Pagaria added.
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 0.5 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.