Nifty PSU Bank index hits new high, rallies 20% in 2 months; here's why

State-run banks, SBI, Uco bank, PSB among others gained up to 2% amid reports that India may considering allowing up to 49% FDI in PSU banks, more than double the current 20% cap.

Nifty PSU Bank index hits record high today

 

Shares of public sector banks (PSBs) are on a roll, with the Nifty PSU Bank index hitting a new high of 8,118.95, soaring nearly 2 per cent on the National Stock Exchange (NSE) in Tuesday’s intra-day trade.

 

At 09:43 AM; Nifty PSU Bank index, the top gainer among sectoral indices, was up 0.89 per cent, as compared to 0.25 per cent rise in the Nifty 50. On Monday, the PSU Bank index hit a high of 8,053.40, and surpassed its previous high of 8,053.30 touched on June 3, 2024. The index has hit a high of 8,118.95 in intra-day trade so far. In the past two months, the Nifty PSU Bank index has zoomed 20 per cent. The benchmark index has gained 6.2 per cent during the same period.

 

 

State Bank of India (SBI), Uco Bank, Punjab & Sind Bank, Central Bank of India, Punjab National Bank (PNB), Indian Bank, Union Bank of India, Bank of Maharashtra and Canara Bank were up in the range of 1 per cent to 2 per cent in intra-day trade today.  FOLLOW STOCK MARKET UPDATES TODAY LIVE

What's driving PSU banks stocks?

 

As per media reports, India is considering allowing foreign direct investment (FDI) of up to 49 per cent in state-run banks — more than double the current 20 per cent cap — as part of efforts to attract overseas capital and align regulations with private sector banks, where foreign ownership is permitted up to 74 per cent.

 

The finance ministry is in discussions with the Reserve Bank of India (RBI), though the proposal is yet to be finalised. The move comes amid rising foreign interest in India’s banking sector. However, the government plans to retain a minimum 51 per cent shareholding in public sector banks.  As per Reuters, “India is planning to allow direct foreign investment in state-run banks of up to 49 per cent, more than double current limits.” After The Economic Times reported this on September 24, Reuters’ October 27 report now suggests that an FII limit hike looks increasingly likely. From a passive flows standpoint, the key impact would come via MSCI indices if the change goes through.

 

According to Nuvama Institutional Equities, the proposal could take a couple of quarters to clear, and MSCI would reflect the higher headroom only after implementation. So, while it may be a long road to actual implementation and passive inflows, if there’s any truth to this development, PSU banks could easily rally 20–30 per cent in anticipation of such massive inflows.  ALSO READ | Nifty IT set for best month since July 2024; but is it out of the woods? 

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

 

While decision on such relaxation is awaited, this could aid diversification in access to capital and valuation, ICICI Securities had said in a note.

 

Once considered aspirational, PSBs have achieved a structural turnaround, with sector RoA reaching ~1.1 per cent in FY25, supported by improved underwriting, cost control, and robust recoveries. PSBs have shown strong improvement, with gross NPAs falling to 2.58 per cent in March 2025 from 9.11 per cent in March 2021. With their strong balance sheets, healthy asset quality, and improving efficiency, analysts at Motilal Oswal Financial Services see scope for a gradual but meaningful re-rating for PSBs. 

 

The brokerage firm further said PSBs are well positioned to benefit from any capex recovery, though near-term growth will continue to be funded by RAM assets. Stronger capital positions, cleaner balance sheets, and prudent provisioning make PSBs more resilient and limit cyclicality in earnings and asset quality relative to past cycles.