<div id="readability-page-1"><div><div>The upcoming rebalancing of Bank Nifty and FinNifty, two of India's leading BFSI indices, will reshape India’s financial market benchmarks by reducing the concentration among the country's largest lenders and giving greater weightage to PSU banks, insurers, NBFCs and exchanges. As a result, shares of bluechip, large-caps HDFC Bank and ICICI Bank may see some short-term selling pressure.This rejig will reduce the overdependence on heavyweights like HDFC Bank and ICICI Bank, while also improving diversification and making the indices more aligned with sector fundamentals. However, in the near-term, short-term outflows and volatility in the indices are to be expected.The Bank Nifty index will expand from 12 to 14 constituents, with the new methodology reducing the weight of the largest stocks to make room for additional names. Union Bank of India and Yes Bank will join the index effective December 31, 2025.<figure></figure>Separately, the Nifty Financial Services index will adopt tighter weight caps, setting individual limits of 19 percent, 14 percent and 10 percent for its top three constituents. Non-F&amp;O stocks will also face stricter controls, capped at 4.5 percent individually and 10 percent in total.<figure></figure>Blue-chips see reduced weightageA key factor driving the rejig is to steeply reduce the weight of HDFC Bank and ICICI Bank, both of which dominate Bank Nifty and FinNifty today. According to Hitesh Tailor, Choice Broking the new structure will make Bank Nifty “less dependent on these heavyweights” and more sensitive to moves in PSU and mid-tier lenders.VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, added that this move will reduce vulnerability, especially for retail traders. “The reduced weight of the majors will make the index less vulnerable to manipulation as happened during the Jane Street episode,” he said.Volatility may see an uptick though. &#34;When private-bank earnings decouple, the index will swing harder. The forward profile shifts from “quality-led compounding” to “cycle-led spikes,” so relative outperformance becomes more macro-linked than franchise-linked,&#34; noted Sonam Srivastava, Founder and Fund Manager at Wright Research PMS.Though the index changes may cause an estimated $322 million and $348 million in passive outflows respectively from HDFC Bank and ICICI Bank, Vijayakumar emphasised the long-term impact will be negligible, &#34;for fairly valued blue chips of this size, medium to long-term performance will not be affected.”He added that given the outflows, there will be some short-term pressure on the large-caps. According to him, the weakness in share prices would be an opportunity for investors and mutual funds to accumulate these stocks.Therefore, while short-term pressure might exist, in the medium- to long-term, the performance of Bank Nifty will not be impacted.PSU Banks rise in weightageThe public banking system has been on a dream run, up over 26 percent this calendar year. The Bank Nifty rejig increases PSU banks’ collective weight in the index, which can lead to both higher returns, and higher volatility.&#34;PSU Bank's ongoing momentum and expected passive inflows can push the index higher as the rebalancing progresses. However, increased PSU influence also means the index may react more sharply to macro cues such as bond yields and policy changes, introducing pockets of short-term volatility,&#34; noted Tailor.Chokaalingam G concurred. While he agreed that public bank stocks are more volatile than private banks, the risk doesn't come from the higher weightage being a public or private bank. &#34;It comes from the size of the bank, with mid-sized banks more volatile than large, established PSUs,&#34; he said. To that extent, there will be more volatility.Srivastava added that if the PSU outperformance sustains, Bank Nifty can actually overshoot on the upside. &#34;The catch is that PSU banks structurally carry lower valuation floors. When the rate cycle turns or fiscal spending cools, the downside gap is wider. So expected returns increase in expansions, and left-tail risk rises in downturns.&#34;FinNifty: the key benchmarkMost banking and financial services mutual funds are benchmarked to the FinNifty index. As the index becomes less bank-heavy, allowing faster-growing non-banking financials to gain prominence, Tailor said that it would lead to a more diversified and balanced financial-sector index over time.This raises key questions for investors: will alpha become harder or easier to generate as the benchmark becomes more diversified, how will changing index behaviour impact future returns, and will fund houses tweak their schemes or stay the course as the new structure comes into effect?According to Chokkalingam, &#34;fund managers should welcome the changes.&#34; He said the biggest challenge for any fund manager is beating the benchmark.&#34;When the benchmark is too concentrated, the chances of underperformance are very high,” he explained. With a more diversified index and lower concentration risk, he believes mutual funds should be happy with these changes since overall volatility is expected to decline.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.</div></div></div>

The rebalancing of India's Bank Nifty and FinNifty indices will reduce the weight of major banks like HDFC and ICICI, potentially causing short-term selling pressure on their stocks. The changes aim to diversify the indices by increasing the weight of PSU banks and other financial entities. While this may lead to short-term volatility, experts believe the long-term impact on blue-chip stocks will be negligible. The adjustments are expected to make the indices less vulnerable to manipulation and more aligned with sector fundamentals.

HDFC Bank, ICICI Bank may see some short-term pressure following change in Bank Nifty, FinNifty weights