PSU Bank Shares Surge on Government’s Foreign Investment Proposal

Shares of state-owned banks in India experienced a notable increase on October 28, 2025, following reports that the government is considering raising the foreign investment cap for public-sector banks (PSBs) to 49%. This proposed limit would more than double the current restriction of 20%. Should this initiative be approved, it is anticipated to generate an influx of approximately $4 billion in foreign capital, particularly linked to MSCI, and elevate valuations across the PSU banking sector.

The Nifty PSU Bank Index rose by 1.4%, reaching an intraday high of 8,118.95, driven by strong buying interest in major banks such as 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 Indian Overseas Bank, which saw a decline in its share price.

According to a report by Reuters, the finance ministry has engaged in discussions with the Reserve Bank of India (RBI) concerning the proposal for several months. The aim is to create regulatory parity between state-run banks and their private-sector counterparts. Currently, foreign investment in private banks can reach up to 74%, contrasting sharply with the 20% cap imposed on public lenders.

Growing Global Interest in Indian Banking

The potential policy shift comes as global interest in Indian banking assets continues to rise. Noteworthy transactions in the sector include 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 suggest that increasing foreign ownership limits for public sector banks could enhance access to global capital markets, thereby improving balance sheets and supporting credit growth in India’s developing economy. Research from Nuvama Alternative & Quantitative Research indicates that raising the limit to 49% could lead to passive inflows of nearly $4 billion through funds linked to MSCI, as these investments adjust to new index weights. For instance, Nuvama estimates that SBI could attract about $2.2 billion in foreign investments, while Bank of Baroda, PNB, Canara Bank, and Union Bank could each receive between $294 million and $362 million. Additionally, Indian Bank stands to gain approximately $459 million from this change.

Currently, foreign institutional holdings in public sector banks range between 4.5% and 12%, leaving significant room for future foreign investment.

Market Analysts Weigh In

Abhilash Pagaria, an analyst at Nuvama Research, cautioned that the proposal is still in its preliminary stages and that even if it gets the green light, the adjustment by MSCI would occur over multiple review cycles. He noted that if the proposal materializes, PSU bank stocks could potentially rally by 20-30% in anticipation of increased foreign participation.

Technical analysts are maintaining a positive outlook on the PSU Bank Index. Anshul Jain from Lakshmishree Investments stated that the index is on a strong upward trend after breaking above 7,248 and could continue to gain towards the 8,125 mark before entering a brief consolidation phase.

As discussions about the foreign investment cap continue, the banking sector remains on alert for developments that could reshape its landscape, potentially opening the door to greater international involvement and investment.