Nifty PSU bank rose by 1.4% following reports that government intends to permit direct foreign investment in state-owned banks up to 49%, which is more than double the current limit of 20%.
Shares Indian Bank, Bank of Maharashtra, State Bank of India (SBI), Union Bank, and others were all in green except for Indian Overseas Bank. Nifty PSU bank touched an intraday high of 8,118.95 level.
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.
A report from Reuters indicated that an increase from the existing limit of 20% is being considered, noting that 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 it is difficult to determine. 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 Abhilash Pagaria.
