Public sector bank stocks could be in for a strong run. Nuvama Alternative & Quantitative Research estimated that the segment could rise 20–30% as investors anticipate a surge of foreign money if the government decides to lift the foreign institutional investment (FII) ceiling. The brokerage, in a report released yesterday, said six PSU banks together could draw $3.98 billion (Rs 33,200 crore) in passive inflows if the FII limit goes up to 49%. 

However, just to remind our readers, these estimates by Nuvama are based on the Reuters report last evening indicating that the Government may raise FII cap in PSU Banks. There is no official announcement on the matter yet. It is based purely on possible scenarios and the expectations that accompany them.  

The Nuvama’s analysis came against the backdrop of reports that the government is considering allowing up to 49% foreign ownership in state-run banks, from the current 20%. The development, first reported by Reuters on October 27, has reignited market interest in the sector. According to the report, even a limited increase in the cap to 26% could bring in $1.19 billion (Rs 9,950 crore) in passive inflows.

Nuvama on PSU Banks: Six banks on the radar

The six banks in focus are State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Canara Bank, Union Bank of India, and Indian Bank. Together, they make up the PSU bank representation in MSCI indices and would be the first beneficiaries of an FII limit change.

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At present, foreign shareholding in these lenders stands between 4.5% and 12%. This means there’s still room within the existing 20% ceiling, but a hike would expand the space for large global funds, particularly those that buy automatically when MSCI adjusts its weights.

Under a 20–26% limit scenario, SBI could see inflows worth $579 million (Rs 4,830 crore), the largest among peers. Indian Bank, which would become a fresh addition to MSCI indices, could attract around $274 million (Rs 2,290 crore). Other state-run banks would see inflows ranging from $70 million to $99 million (Rs 585–825 crore).

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Nuvama on PSU Banks: Larger hike could trigger far bigger flows

If the government allows up to 49% foreign ownership, the effect multiplies. Nuvama estimates inflows into SBI could touch $2.2 billion (Rs 18,400 crore), while Indian Bank could draw $459 million (Rs 3,850 crore).
PNB, Bank of Baroda, Canara Bank, and Union Bank of India could each see between $294 million and $362 million (Rs 2,460–3,030 crore).

The brokerage said such changes in index weight would likely happen gradually. “The proposal could take a couple of quarters to clear, and MSCI would factor in the higher headroom only after implementation,” Nuvama noted. It expects the rebalancing to happen in phases across multiple review cycles.

Nuvama on PSU Banks: Why this matters now

The current 20% cap under the Banking Regulation Act has long restricted foreign ownership in PSU banks, even as private banks are allowed up to 74%. According to Nuvama, raising the limit would narrow that gap and open a much larger investible pool for global funds.

Nuvama said that if foreign ownership opens up, passive fund inflows alone could push these valuations higher. “Even before implementation, anticipation of higher foreign participation could drive re-rating,” the brokerage wrote.

Nuvama on PSU Banks: Broader implications for India’s market weight

A higher FII cap would not just impact individual PSU banks. It would also increase India’s overall share in global indices. Nuvama pointed out that, MSCI calculates weights using the portion of each company’s free float available to foreign investors called the “foreign inclusion factor.” Raising the cap to 49% increases that float, which in turn boosts both company-level and country-level weights.

India’s weight in MSCI Emerging Markets has already climbed to 19%, from about 8% five years ago. If PSU banks open further, that trend could accelerate, drawing a fresh wave of global passive flows into Indian equities.

Nuvama expects that such anticipation alone could lead to a sector rally of 20–30%, especially in the larger banks where index-tracking funds are most active. The brokerage also said MSCI would likely spread the inclusion process over multiple quarters to keep price movement orderly.