The Nifty PSU Bank Index has surged nearly 20% since August, touching a fresh 52-week high and rallying as much as 46% from the March lows. The combined market cap of all public-sector banks now stands close to Rs 18 lakh crore, underscoring a sector-wide re-rating driven by improving fundamentals, policy tailwinds, and rising foreign investor interest.
Leading the charge, Indian Bank has delivered a stellar 26% return in just two months, while Bank of India and Canara Bank have each gained over 20%. Heavyweights like SBI, PNB, and Bank of Baroda have rallied between 14–16%, cementing PSU banks‘ position as one of 2025’s most unexpected outperformers — even as broader market sentiment has remained cautious.
Also Read | SBI, other PSU banks stocks rise up to 3% on reports of government move to raise FDI limit to 49%
The $4 Billion Catalyst
India’s state-run banks could see a windfall of up to $4 billion in passive inflows if the government raises the foreign institutional investment (FII) limit to 49% from the current 20%, according to a report by Nuvama Institutional Equities.”If there’s any truth to this development, PSU banks could easily rally 20–30% in anticipation of such massive inflows,” the brokerage said.Nuvama’s analysis shows potential MSCI-linked inflows of around $4 billion across six major public sector lenders, which include State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Canara Bank, Union Bank of India, and Indian Bank, if the cap is lifted.
If the FII limit is increased to 49%, SBI could attract about $2,203 million in passive flows, followed by Indian Bank at $459 million, Bank of Baroda at $362 million, PNB at $355 million, Canara Bank at $305 million, and Union Bank at $294 million, as per Nuvama’s estimates.
India is planning to allow direct foreign investment in state-run banks of up to 49%, more than double current limits, according to a Reuters report. The finance ministry has been discussing the matter with the Reserve Bank of India (RBI) over the past couple of months, though the proposal has yet to be finalized.
The government plans to retain a minimum shareholding of 51% in state-run banks. Current foreign ownership in state-run banks ranges from a high of about 12% in Canara Bank to near zero in UCO Bank as of September 30, according to data from stock exchanges.
Rising FII Interest
Foreign interest in India’s banking industry is on the rise as evidenced by Dubai-based Emirates NBD’s recent $3 billion purchase of a 60% stake in RBL Bank and Sumitomo Mitsui Banking Corp’s $1.6 billion acquisition of a 20% stake in Yes Bank, which the Japanese lender later raised by another 4.99%.
“From a passive flows standpoint, the key impact would come via MSCI indices if the change goes through,” Nuvama said, adding that any implementation of higher FII limits would likely be reflected “in a staggered manner across multiple review cycles.”
The Bull vs. Bear Debate
Shibani Sircar Kurian, Kotak Mahindra AMC, believes select opportunities remain: “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.
She said the valuations in the banking sector is attractive, especially relative to history, notwithstanding the near-term move. “So overall, our view on banks is positive, slight preference for privates but within the PSU bank our preference remains for the larger names where you still see possibility of return ratio improving and valuations are in your favour.”
Master Capital Services’ Vishnu Kant Upadhyay said many of these major PSU banks are trading above their key moving averages and exhibiting constructive price patterns, suggesting a continuation of the ongoing uptrend.
“Several names have also registered fresh breakouts, signaling potential for new record highs. However, a few banks, despite being in the green, continue to trade below crucial moving averages and supply zones,” he said, adding that any near-term pullbacks may offer opportunities to accumulate for the medium to long term.
However, not everyone is convinced the rally has legs. Seshadri Sen of Emkay Global struck a cautionary note: “PSU banks are set for a strong H2FY26E, 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. Even the short-term H2FY26E trade is at risk if long bond yields spike, which is a real possibility if tax collections undershoot.”
The debate continues: while PSUs may not be the flavor of 2025 just the way it was in the previous two years, the recent rally suggests the sector still has surprises left in store.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)