Quarterly shareholding data shows FIIs increased their exposure to nearly all major PSU banks between June and September 2025. Bank of Baroda saw its FII shareholding rise from 8.08% to 8.71%, while Canara Bank gained 0.51 percentage points to 11.89%. Bank of India posted one of the sharper jumps, with foreign ownership climbing from 3.53% to 4.24%, a 0.71 percentage point increase.
Among smaller lenders, Bank of Maharashtra saw FII shareholding rise by 0.46 percentage points to 2.35%, and Indian Overseas Bank recorded a 0.23 percentage point uptick to 0.31%. State Bank of India, the country’s largest lender, saw foreign stakes increase from 9.32% to 9.57%, while Union Bank of India moved up from 7.70% to 7.86%.
A few names, however, bucked the trend. Central Bank of India and Punjab & Sind Bank saw marginal declines of 0.09 percentage points each, while UCO Bank’s FII holding remained flat at 0.13%.
The $4 billion catalyst
The renewed FII interest comes amid growing chatter that the government could lift the foreign ownership cap in PSU banks to 49% from the current 20%. The move, if cleared, could trigger billions in passive inflows and reshape the sector’s investor base.
According to Nuvama Institutional Equities, such a policy shift could unlock up to $4 billion across PSU lenders. “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 inflows of about $2.2 billion, followed by Indian Bank at $459 million, Bank of Baroda at $362 million, Punjab National Bank at $355 million, Canara Bank at $305 million, and Union Bank of India at $294 million.
A Reuters report recently said the finance ministry is in discussions with the Reserve Bank of India to allow up to 49% direct foreign ownership in state-run banks while maintaining the government’s minimum 51% stake.
“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.”
Technical strength meets valuation comfort
The PSU bank rally has been backed by both technical momentum and improving balance sheet fundamentals. The Nifty PSU Bank index ended October at 8184.35, up from 7526.75 at the end of September. On October 31, state-run bank stocks extended gains, with Union Bank surging nearly 5%, and Canara Bank rising up to 2.4%, as traders bet on higher FII limits and sector re-rating potential.
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 noted that “several major PSU banks are showing bullish price structures,” adding that “several names have also registered fresh breakouts, signaling potential for new record highs.” He said any short-term pullbacks could be “opportunities to accumulate for the medium to long term.”
Not everyone is buying the euphoria
Some analysts warn the rally may not sustain beyond the short term. 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,” said Sen.
“Even the short-term H2 FY26 trade is at risk if long bond yields spike, which is a real possibility if tax collections undershoot,” Sen said.
For now, the September-quarter data makes one thing clear — FIIs are steadily rebuilding exposure to India’s state-run banks. Whether this quiet accumulation turns into a sustained uptrend will likely hinge on the government’s next policy move.
Also read | PSU Banks gain up to 5%. Here are 3 factors driving the surge in state-run lenders
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)
