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On Tuesday, October 28, 2025, shares of state-owned banks surged after reports surfaced that the government might permit foreign ownership of public-sector banks (PSBs) to a limit of 49%, which is more than double the previous limit of 20%. If the proposal is approved, it is likely to trigger another $4 billion inflows linked to MSCI and drive valuations higher throughout the PSU banking space.
The Nifty PSU Bank index gained 1.4% and reached an intraday high of 8,118.95, due to strong buying interest in State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda, Union Bank of India, Indian Bank, and Bank of Maharashtra. Only the Indian Overseas Bank traded lower.
According to a Reuters report, the finance ministry has been in talks with the RBI for several months about the proposal, which aims to bring regulatory parity between state-run and private-sector banks.
Currently, foreign investment is permitted up to 74% in private banks, compared to just 20% in public lenders.
The potential policy change comes amid growing global interest in Indian banking assets. Recent high-profile deals include Emirates NBD’s $3 billion acquisition of a 60% stake in RBL Bank and Sumitomo Mitsui Banking Corp’s $1.6 billion investment for a 20% stake in Yes Bank, later increased to 24.99%.
Analysts suggest that increasing foreign ownership limits for public sector banks would allow for improved access to global capital markets, helping balance sheets and supporting credit growth in a developing economy.
Nuvama Alternative & Quantitative Research has indicated that increasing the limit to 49% could bring in passive inflows of nearly $4 billion through funds linked to MSCI when these flows through into index weights.
For instance, they estimated the State Bank of India could capture approximately $2.2 billion in foreign investment while Bank of Baroda, PNB, Canara Bank, and Union Bank would each receive anywhere from $294 million to $362 million. Indian Bank could potentially receive $459 million in new inclusion.
Currently, foreign institutional holdings in public sector banks are between 4.5% and 12%, which is well below the cap and leaves room for foreign investment.
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Abhilash Pagaria of Nuvama Research cautioned that the proposal remains at a preliminary stage, and even if approved, MSCI would phase in the adjustment across multiple review cycles.
However, he noted that if the move materializes, PSU bank stocks could rally 20-30% in anticipation of increased foreign participation.
Technical analysts maintain a bullish outlook. Anshul Jain of Lakshmishree Investments said the PSU Bank Index remains in a strong uptrend after a breakout above 7,248 and could extend gains toward 8,125 before a brief consolidation.
