HDFC Bank Takes the Lead in Nifty 50, Implications for Bank Nifty

Introduction

The Nifty 50 index has undergone a significant transformation with the emergence of HDFC Bank as the largest weighted stock, surpassing Reliance Industries. This development marks a homecoming for HDFC Bank, as both HDFC and HDFC Bank previously held higher weights than Reliance Industries in 2017. While Reliance Industries remains the largest Indian company by market capitalization, HDFC Bank's merger with its parent company has propelled it to the top position in the Nifty 50. This blog explores the implications of this shift and its impact on the Bank Nifty index.

HDFC Bank's Ascendancy

HDFC Bank's remarkable journey within the Nifty 50 is evident when comparing its position in 2002, where it ranked 14th with a weightage of 1.8 percent, to its current status as the crown jewel of the index. The combined entity of HDFC Bank now boasts a market capitalization of Rs 12 lakh crore. This shift in prominence highlights the bank's consistent growth and investor confidence in its performance.

Reliance Industries' Resilience

While HDFC Bank has claimed the top spot in the Nifty 50, Reliance Industries maintains its status as the largest Indian company in terms of market capitalization, currently standing at Rs 18.69 lakh crore. Reliance Industries is the only stock that has consistently remained in the Nifty 50's top 10 leagues over the past 20 years. Even after the demerger of Jio Financial Services, its weightage is expected to remain above 10 percent. Analysts estimate the JFS share price to range between Rs 130-160.

Implications for Index Funds

The composition of the Nifty 50 index plays a crucial role for index funds, hedge funds, and exchange-traded funds that benchmark their allocation to indices. However, in the case of the HDFC Bank and HDFC merger, there will be no significant outflows from funds benchmarked to the Nifty 50, as the shares of HDFC will be converted into HDFC Bank shares. Shareholders will receive 42 fully paid-up shares of HDFC Bank for every 25 shares held in HDFC.

Bank Nifty Considerations

Contrary to a viral WhatsApp forward, HDFC Bank's weightage in the Bank Nifty index will not reach 52.40 percent. The National Stock Exchange (NSE) has imposed weight ceilings to mitigate concentration risk, allowing a maximum weightage of 33 % for a single stock and 62 % for the cumulative top three free-float stocks

As a result, HDFC Bank's weight in the Bank Nifty index will increase from 26.90 % to 29.10 %, while the cumulative weight of the top three banking index stocks (HDFC Bank, ICICI Bank, and State Bank of India) will marginally rise to 62 % after the merger.

Conclusion

HDFC Bank's emergence as the biggest weight in the Nifty 50 reflects its phenomenal growth and reaffirms its position as a leader in the Indian banking sector. While Reliance Industries maintains its dominance in terms of market capitalization, HDFC Bank's ascent signals its resilience and continued investor confidence. The merger between HDFC Bank and HDFC Ltd. will not result in significant outflows from funds benchmarked to the Nifty 50. In the Bank Nifty index, the weightage adjustments will ensure a balanced representation of the top banking stocks, in line with the NSE's weight ceilings.