Is Reliance overweighing Nifty?

Nifty 50, the broad market index in India, tracks blue-chip companies, which are the largest and the most liquid stocks, listed on National Stock Exchange (NSE).

Nifty is a float-adjusted market-capitalisation weighted index. This means that the stocks that have a higher market cap along with free float, which indicates the number of shares available for the public to trade in and get higher weights in the index.

Reliance Industries’ weightage in the index has grown from around 5 per cent in September 2016 to nearly 14.90 per cent in September 2020. Whereas, the leader in 2016 i.e. HDFC Bank, which had a weightage of around 8 per cent in FY16, has more or less maintained its weightage of 8 per cent to 9 per cent. This is a result of the way how free-float market cap-weighted indices are designed. These indices tend to assign more weightage to the stocks that perform relatively better over time and thereby, increase their market cap. Thus, the stocks that are in momentum tend to change their weights over time.

Reliance has not only increased its weightage but has also improved its ranking in weightage. It was at the fourth position in September 2016 behind HDFC Bank (8 per cent), HDFC (6.97 per cent) and Infosys (6.54). However, in September 2020, Reliance contributed the largest weightage in Nifty of around 14.9 per cent, followed by HDFC Bank (9.67 per cent), Infosys (7.62 per cent), and HDFC (6.43 per cent).