For the past few days, the Indian stock market saw extreme volatility; however, a few stocks still managed to survive. One of those stocks is IndusInd Bank, which gained unexpectedly despite a downtrend in the overall market. On Monday, IndusInd Bank shares jumped more than 3% as investors expect huge inflows following a probable increase in its weightage in the MSCI index. This blog delves into the current market dynamics surrounding IndusInd Bank, the factors influencing its stock price, and the potential implications of the upcoming MSCI weight hike for investors.
Stock Performance: A Glimpse at the Recent Trends
IndusInd Bank has been on a roller coaster ride over the last year. The bank’s stock has taken a beating in the short term, having declined by more than 28 per cent in the last three months, more than 32 per cent in the last six months, and over 42 per cent in the previous year. That said, the declines have started trending the other way of late. On 27th November 2024, the stock had gained significantly at 3.80%, closing at ₹973.30 on the Bombay Stock Exchange (BSE), when the rest of the market witnessed a deep sell-off.
What’s driving this?
The biggest driver of the surge in the stock price of IndusInd Bank is passive fund inflows. These inflows are likely to be triggered as the bank may weigh more on the MSCI index. MSCI, an acronym for Morgan Stanley Capital International, is the international benchmark measuring the large- and mid-cap performance of companies in multiple emerging markets. Generally, mere inclusion in the MSCI index or a higher weight in the index triggers considerable inflows of passive funds and exchange-traded funds (ETFs), which track this index.
1. Possible Impact
According to the latest shareholding report for the quarter that ended in December 2024, the Foreign Portfolio Investors (FPI) stake in the private lender of IndusInd Bank has decreased from 55.53% to 46.63%. This reduction in foreign holdings has inadvertently created room for additional foreign inflows. The stock’s weightage in the MSCI index is expected to double from its current 22 basis points to 44 basis points during the February 2025 MSCI index review. According to Abhilash Pagaria, a prominent analyst at Nuvama Alternative & Quantitative Research, this weight hike could lead to inflows between $250 million and $300 million into IndusInd Bank shares.
The inflows are expected to impact the stock for three to five trading days after the MSCI rebalancing, with the outright adjustments scheduled for 28 February 2025. The doubling of the weight of IndusInd Bank in the MSCI index bodes well for the stock in the near to medium term.
2. The Passive Fund Inflows
Large sources of investment in the stock market have been passive funds that track indices like the MSCI. An increase in the weight of a stock increases its representation within the index, and this always compels fund managers to rebalance their portfolios by this new weight. The process results in a lot of buying that pushes the price of the stock up.
For IndusInd Bank, once the MSCI weight hike is confirmed, significant capital will flow into the stock. The resulting increase in demand could stabilize the stock price, supporting the stock in otherwise volatile market circumstances. This might have a critical influence on the days following the MSCI rebalancing event, as passive funds adjust positions.
3. Short-Term Outlook for IndusInd Bank
IndusInd Bank, despite the positives that could lead to an MSCI weight increase, has been one of the underperforming stocks lately. The company’s stock has declined by over 28% in the last three months and by a massive 42% over the last year. Such a trend does not augur well for investors who had expected such strong growth on the back of the bank’s robust earnings and diversification initiatives in its business streams.
The shares of IndusInd Bank are likely to remain sideways short term. According to Ruchit Jain, Vice President-Equity Technical Research at Motilal Oswal Financial Services, this stock is stuck between ₹925 on the support side and ₹992 to ₹1,000 on the resistance side. Any bounce in the stock above these levels could be an indication of a bigger movement of the stock upwards, but up to this point, the range-bound trend of the stock is expected to continue.
The MSCI Rebalancing and IndusInd Bank’s Future
The rebalancing of the MSCI index is a major event for IndusInd Bank and its investors. The increase in the weight of the bank in the index will provide the stock with much-needed support from passive inflows. This is going to be a critical move for the future of the bank, especially about the stock price performance.
With passive funds now on a path of ever-increasing growth and dominance, any stock added or weight enhanced in the MSCI index has generally sustained its price rise over a considerable period. That will come in handy, particularly for the institutionally-dominated approach that follows an indexing strategy. As such, it should benefit the IndusInd Bank’s equity long term going forward.
Next for IndusInd Bank
The future outlook for IndusInd Bank will be driven by factors beyond MSCI rebalancing, including performance in retail and corporate banking, innovative ability in digital banking, and strategic moves to strengthen the balance sheet. As the Indian banking sector evolves, IndusInd Bank will need to keep changing to suit the new needs of customers, especially digital services, where demand for user-friendly and efficient banking solutions is on the rise.
While this recent rally in the stock price can be because of the expected hike in the weight of MSCI, an appropriate analysis of the economy and finance of India with other aspects needs to be well-seen. IndusInd Bank, just like others, faces regular inflation and fluctuating interest rates, as well as still recovering from the pandemic. This notwithstanding, the diversified portfolio of the bank and strong retail and corporate banking market will support good growth prospects.
Conclusion: A stock in flux with promising potential
IndusInd Bank stock price has seen sharp declines and considerable challenges in the last year, but it is now enjoying a rally in response to MSCI weight hike expectations and passive fund inflows. In the short term, the future remains uncertain, but the possibility of doubling the MSCI weight for the bank gives investors an excellent opportunity to capture inflows and positive momentum.
As always, investors should be watchful and monitor the stock closely, keeping a close eye on key technical levels, market conditions, and the broader economic environment. IndusInd Bank’s ability to navigate these challenges while leveraging the benefits of its potential MSCI weight increase could determine the stock’s future trajectory. With the support of passive fund inflows and a growing market share, IndusInd Bank’s stock could be poised for recovery in the medium to long term, making it an interesting investment for those looking for exposure to India’s dynamic banking sector.
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