HDFC Bank to see MSCI weight rise with increased FPI investment headroom

Higher FPI investment room opens door for $1.8 bn passive inflows

India's largest private sector lender HDFC Bank is poised to see its weight increase further in global services provider MSCI indices due to its expanded foreign portfolio investor (FPI) investment headroom.

The bank's latest shareholding data, ending September 2024, reveals FPI headroom at 24.97 per cent, surpassing the 20 per cent threshold set by MSCI.

Analysts anticipate that MSCI's November review will boost HDFC Bank's weight, triggering passive inflows of over $1.8 billion (Rs 15,000 crore).

“HDFC Bank will see the second round of weight up in the November review, which should attract $1.8 billion inflows (about 5.5 times average daily volumes),” said a note by IIFL Alternative Research.

In August, MSCI announced a two-tranche weight increase, contingent upon maintaining FPI headroom above 20 per cent. The August announcement initially disappointed the market, which had expected a one-time weight increase. Additionally, concerns arose over HDFC Bank's ability to maintain an FPI investment headroom above the 20 per cent threshold.

HDFC Bank has underperformed the market this year, down 2 per cent year-to-date versus Nifty's 15 per cent rally, following the disappointing post-merger performance. However, the bank's latest pre-quarter update showed robust deposit growth, driven by term deposits, surpassing analyst expectations.

“We expect NIMs to expand by 5 basis points quarter-on-quarter to about 3.5 per cent. We continue to expect margins to improve in the coming quarters as the incremental deposits replace the high-cost borrowings of erstwhile HDFC,” said a note by investment banking company Macquarie, which has a ‘buy’ rating on the stock with a price target of Rs 1,900.

Shares of HDFC Bank on Friday fell 1.5 per cent to Rs 1,657.