HDFC Bank, ICICI Bank May Face Short-Term Selling as Bank Nifty & FinNifty Shift Toward Diversification

India’s financial market benchmarks are set for a major overhaul as the Bank Nifty and FinNifty indices undergo a significant diversification-driven rejig, reducing the weightage of their two largest components — HDFC Bank and ICICI Bank. These blue-chip lenders have historically dominated both indices. Still, the new methodology aims to bring more balance, lower concentration risk, and offer better representation to PSU banks, insurers, NBFCs, and stock exchanges.

With the weightage of HDFC Bank and ICICI Bank expected to decline, analysts believe these stocks may experience short-term selling pressure, especially from passive funds and index-aligned portfolios. At the same time, the rejig is designed to reshape the structure of India’s BFSI indices for long-term stability and broader participation across the sector.

Why Bank Nifty & FinNifty Are Being Reshaped?

For years, Bank Nifty and FinNifty have reflected the dominance of the country’s largest private lenders — HDFC Bank and ICICI Bank. Their high weightage has often led to a situation where the movement of these two stocks disproportionately influences the indices.

To correct this imbalance, the upcoming rebalancing aims to:

• Reduce overdependence on a couple of heavyweight banks

• Increase diversification across PSU banks, insurers, NBFCs, and exchanges

• Bring index composition closer to sector fundamentals

• Create a more balanced BFSI benchmark

The shift marks a structural change intended to make the indices more reflective of the full financial ecosystem, rather than just two dominant players.

Bank Nifty to Expand From 12 to 14 Stocks

One of the most important changes happens within the Bank Nifty index, which will expand from 12 to 14 constituents.

Two new names will be added:

• Union Bank of India

• Yes Bank

These changes become effective from December 31, 2025.

The methodology update will also reduce the weight of the largest stocks, creating space for additional constituents and distributing influence more evenly across the index. This move is expected to significantly alter how Bank Nifty reacts to market triggers, especially those related to PSU lenders and mid-tier banks.

Also Read: Stock Market Today: Sensex, Nifty Rise After Early Slide Amid Broad-Based Buying

Reduced Weightage for HDFC Bank and ICICI Bank

A central driver of this rebalancing is the significant reduction in the weightage of HDFC Bank and ICICI Bank, which currently dominate both indices.

According to Hitesh Tailor of Choice Broking, the new structure will make Bank Nifty “less dependent on these heavyweights” and more responsive to movements in PSU and mid-tier lenders. This shift also means that the performance of the index will be more evenly distributed, lowering the outsized influence of two stocks and improving sector-wide representation.

However, as their weightage gets cut, HDFC Bank and ICICI Bank may see:

• Short-term outflows

• Temporary selling pressure

• Higher volatility around the effective date

These reactions are typical during index rebalancing phases as passive funds adjust holdings.

PSU Banks Gain Bigger Role in Bank Nifty

One of the most striking outcomes of the rejig is the rise in influence of PSU banks.

The public sector banking system has been on a strong run, gaining over 26% in the current calendar year, and the new structure acknowledges this performance by increasing their collective weight in Bank Nifty.

With higher weightage, PSU banks may:

• Play a larger role in driving index movement

• Contribute to both higher returns and higher volatility

• Gain more visibility among institutional and passive investors

This is a meaningful shift, as Bank Nifty will no longer be as heavily skewed toward private banking giants.

FinNifty to Become More Broad-Based

The rebalancing also impacts FinNifty, which serves as the benchmark for many banking and financial services mutual funds.

Currently dominated by banking stocks — led again by HDFC Bank and ICICI Bank — FinNifty will now evolve to become:

• Less bank-heavy

• More diversified

• More reflective of fast-growing non-banking financial companies

With insurers, NBFCs, and exchanges receiving greater weight, the index will better capture the expanding financial services landscape.

According to Hitesh Tailor, this will lead to a more balanced financial sector index over time, offering a more holistic representation of the industry beyond just banks.

Short-Term Volatility Expected, Long-Term Balance Achieved

While the rejig aims to strengthen the structural quality of the indices, short-term volatility is expected, especially in stocks seeing weightage cuts or increases. HDFC Bank and ICICI Bank — being the biggest losers in terms of weightage — may witness short-term selling.

Simultaneously, stocks gaining prominence in the index may see increased interest as passive funds and index-based portfolios rebalance their positions.

Overall, the transition reflects a move toward:

• Better diversification

• More balanced market representation

• Lower concentration risk

• Higher participation from emerging BFSI segments

This shift will likely reshape how investors view and track the performance of India’s financial markets through these widely followed indices.

Click here to explore
Gift Nifty
FII DII Data
IPO