PSU Bank Stocks Surge as Government Eyes Foreign Investment Increase

Shares of state-owned banks in India experienced a significant rally on October 28, 2025, following reports that the government is considering raising the foreign ownership cap in public-sector banks (PSBs) to 49%. This proposed increase, more than double the current limit of 20%, could potentially lead to an influx of foreign capital estimated at around $4 billion.

The Nifty PSU Bank Index climbed by 1.4%, reaching an intraday high of 8,118.95, primarily driven by strong buying interest in major banks including the State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda, Union Bank of India, Indian Bank, and Bank of Maharashtra. The only exception was the Indian Overseas Bank, which saw a decline in its stock price.

Government Discussions on Policy Change

According to a report from Reuters, discussions between the Finance Ministry and the Reserve Bank of India (RBI) regarding this proposal have been ongoing for several months. The intention behind the change is to create regulatory parity between state-run and private banks, where foreign investment is currently allowed up to 74%.

The growing interest in Indian banking assets has been underscored by recent high-profile transactions, including Emirates NBD‘s acquisition of a 60% stake in RBL Bank for $3 billion and Sumitomo Mitsui Banking Corp‘s investment of $1.6 billion for a 20% stake in Yes Bank, which was later increased to 24.99%. Analysts argue that increasing foreign ownership limits for PSBs could facilitate better access to global capital markets, enhancing balance sheets and supporting credit growth in India’s developing economy.

Potential Financial Impacts

Research by Nuvama Alternative & Quantitative Research suggests that increasing the foreign investment cap to 49% could lead to passive inflows of nearly $4 billion through funds linked to MSCI index weights. The report indicates that SBI could attract approximately $2.2 billion, while Bank of Baroda, PNB, Canara Bank, and Union Bank each stand to gain between $294 million and $362 million. Additionally, Indian Bank could see an influx of around $459 million.

Currently, foreign institutional holdings in public sector banks range from 4.5% to 12%, leaving considerable room for new foreign investments.

Analysts like Abhilash Pagaria of Nuvama Research caution that the proposal is still in its preliminary stages. Even if it receives approval, adjustments by MSCI would likely occur over multiple review cycles. Pagaria noted that if the proposal progresses, PSU bank stocks could anticipate a rally of 20% to 30% due to increased foreign participation.

Technical analysts maintain an optimistic outlook, with Anshul Jain of Lakshmishree Investments asserting that the PSU Bank Index remains in a strong uptrend. After breaking above 7,248, Jain suggests that the index could extend gains toward 8,125 before experiencing a brief consolidation.

The developments in the PSU banking sector signal a potential shift in the landscape of Indian banking, with increased foreign investment possibly paving the way for enhanced growth and stability in the sector.