SBI, PNB, Indian Bank, other PSU banks rally on reports govt may raise foreign investment cap to 49%

The Nifty PSU bank rose by 1.4% on Tuesday, October 28, following reports that the government intends to permit direct foreign investment in state-owned banks of up to 49%, which is more than double the current limit of 20%.

Barring Indian Overseas Bank, shares of Indian Bank, Bank of Maharashtra, State Bank of India (SBI), Union Bank, and others traded in the green. Nifty PSU bank touched an intraday high of 8,118.95.

The finance ministry has been in discussions with the Reserve Bank of India (RBI) regarding this issue for the past few months, although the proposal has not yet been finalised, said Reuters in its report.

This action also aims to reduce the disparity between the regulations governing government-owned and private banks. In India, foreign ownership is permitted up to 74% for private banks.

Interest from foreign investors in India's banking sector is increasing, highlighted by Emirates NBD of Dubai's recent acquisition of a 60% stake in RBL Bank for $3 billion and Sumitomo Mitsui Banking Corp's $1.6 billion investment for a 20% stake in Yes Bank, which the Japanese bank later enhanced by an additional 4.99%.

State-owned banks are also attracting attention from international investors, and adjusting the foreign ownership limit is expected to help them secure more capital in the upcoming years, as reported by Reuters.

Abhilash Pagaria, Head of Nuvama Alternative & Quantitative, stated in a report that in recent years, there has been ongoing discussion regarding a potential increase in the FII limit for PSU banks. However, the exact timing has always been unpredictable.

Pagaria conveyed that the proposal may take several quarters to be approved, and only after that would MSCI incorporate the increased capacity into its indices.

“FII holdings across PSU banks currently range between 4.5% and 12%. With the existing 20% cap, there’s still room — meaning the limit isn’t binding yet. That said, even a conservative hike from 20% to 26% could trigger meaningful passive inflows. A move to 49% would be far more significant, likely prompting MSCI to implement the change in a staggered manner across multiple review cycles, in our view,” said Pagaria.

Technical Views

According to Anshul Jain, Head of Research at Lakshmishree, post a 201-day VCP breakout at 7,248, the PSU Bank Index has delivered a strong rally, recently testing its all-time high of 8,053.3. The move appears slightly extended, but momentum remains robust, supported by sustained strength across major PSU banking names, Jain opined.

“We believe the upmove can extend toward 8,125, where profit booking may likely emerge as the index consolidates gains. Overall, the trend remains firmly bullish, and any dips toward key moving averages should be viewed as buying opportunities for continuation of the larger uptrend,” added Jain.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.