Here are the 3 factors behind the rally:
1. Foreign investors quietly rebuild positions
Foreign institutional investors (FIIs) have been steadily lifting their stakes in PSU banks through the September 2025 quarter, signalling a revival of confidence in the state-run lenders. Shareholding data show FIIs increased exposure across nearly every major bank, from Bank of Baroda and Canara Bank to State Bank of India.
Bank of Baroda’s FII ownership rose from 8.08% in the June quarter to 8.71% in the September quarter, Canara Bank gained 0.51 percentage points to 11.89%, and Bank of India saw a 0.71 percentage point jump to 4.24%. Among smaller lenders, Bank of Maharashtra’s foreign stake climbed to 2.35%, and Indian Overseas Bank edged up to 0.31%.
State Bank of India, the country’s largest lender, saw foreign holdings increase to 9.57% from 9.32%. Only a few names lagged, Central Bank of India and Punjab & Sind Bank, which saw marginal declines, while UCO Bank’s FII holding stayed flat.
2. Policy buzz over higher FII limits
The rally has been reinforced by speculation that the government may raise the foreign ownership limit in PSU banks to 49% from 20%, a move that could reshape the sector’s investor base. According to Nuvama Institutional Equities, such a change could unlock as much as $4 billion in passive inflows.
“If there’s any truth to this development, PSU banks could easily rally 20–30% in anticipation of such massive inflows,” Nuvama said. The brokerage estimates State Bank of India could attract about $2.2 billion, followed by Indian Bank ($459 million), Bank of Baroda ($362 million), Punjab National Bank ($355 million), Canara Bank ($305 million), and Union Bank of India ($294 million).
A Reuters report said the finance ministry is in talks with the Reserve Bank of India to lift the ceiling while keeping the government’s minimum 51% stake intact. “From a passive flows standpoint, the key impact would come via MSCI indices if the change goes through,” Nuvama noted, adding that any adjustments would likely be implemented “in a staggered manner across multiple review cycles.”
3. Technical momentum and balance sheet comfort
Beyond policy hopes, the rally has found support in stronger financials and market momentum. The Nifty PSU Bank index ended October at 8184.35, up from 7526.75 in September. On the day, Bank of Baroda shares rose about 4%, while stocks such as UCO Bank, PSB, Central Bank and Canara Bank climbed over 2%.
Shibani Sircar Kurian of Kotak Mahindra AMC said, “Within the PSU banks, there are specific picks where some of the larger PSU banks are better placed to benefit both from credit growth picking up, especially on the retail front as well as margins bottoming out because your cost of deposits start to play out in terms of lower cost of funds and these banks which have a better retail liability franchise are well placed.”
Vishnu Kant Upadhyay of Master Capital added that “several major PSU banks are showing bullish price structures,” with “several names have registered fresh breakouts, signalling potential for new record highs.” He noted that any short-term corrections could be “opportunities to accumulate for the medium to long term.”
But can the rally last?
Not everyone is convinced this momentum will hold. Seshadri Sen of Emkay Global cautioned, “PSU banks are set for a strong H2 FY26, but the momentum is set to fizzle out in FY27E.”
“Loan growth is set to accelerate with the overall market momentum, but with limited deltas. On the other hand, the drop-off in treasury income and high opex growth due to a new wage agreement would drive lower ROAs and ROEs for most PSU banks. The relatively attractive valuations lack a long-term rerating trigger, and we see no case for a long-term investment thesis,” Sen said.
Sen said that “even the short-term H2 FY26 trade is at risk if long bond yields spike, which is a real possibility if tax collections undershoot.”
For now, the 7% weekly jump suggests optimism is building, with foreign investors returning, policy signals turning supportive, and fundamentals improving. But as the sector’s rally stretches higher, investors face the question that could define the next phase: is this the start of a lasting re-rating, or another fleeting burst of enthusiasm for India’s state-run banks?
Also read | FIIs boost holdings in state-run banks in the September quarter. Is the smart money betting on a breakout?
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)