Here are the three factors behind the rally:
1. Foreign investors are quietly rebuilding their positions
Foreign institutional investors (FIIs) have steadily increased their holdings in PSU banks during the September 2025 quarter, signaling a revival in confidence in the state-run lenders. Stock ownership data shows that exposure to financial institutions has increased at almost every major bank, from Bank of Baroda and Canara Bank to State Bank of India.
Bank of Baroda’s FII holding rose to 8.71% in the September quarter from 8.08% in the June quarter, Canara Bank gained 0.51 percentage point to 11.89% and Bank of India saw a jump of 0.71 percentage point to 4.24%. Among smaller lenders, Bank of Maharashtra’s foreign holding rose to 2.35%, while Indian Overseas Bank gained a lead of 0.31%.
State Bank of India, the country’s largest lender, saw foreign holdings rise from 9.32% to 9.57%. Only a few names were left behind, Central Bank of India and Punjab & Sind Bank, which saw marginal declines, while UCO Bank’s FII shares were flat.
2. Policy buzz about higher FII limits
The rally was boosted by speculation that the government may increase the limit on foreign ownership in PSU banks from 20% to 49%, a move that could reshape the sector’s investor base. According to Nuvama Institutional Equities, such a change could generate as much as $4 billion in passive inflows.
“If there is any truth to this development, PSU banks could easily rise 20-30% in anticipation of such huge inflows,” Nuvama said. The broker estimates that State Bank of India could attract around $2.2 billion, followed by Indian Bank ($459 million), Bank of Baroda ($362 million), Punjab National Bank ($355 million), Canara Bank ($305 million) and Union Bank of India ($294 million).
According to a Reuters report, the finance ministry is in talks with the Reserve Bank of India to lift the cap while keeping the government’s minimum 51% stake intact. “From a passive flows perspective, the most significant impact would come through the MSCI indices if the change continues,” Nuvama noted, adding that any adjustments would likely be “distributed over multiple rating cycles.”
3. Technical momentum and balance comfort
In addition to policy hopes, the rally has found support in stronger financial data and stronger market momentum. The Nifty PSU Bank index ended October at 8184.35, compared to 7526.75 in September. On the day, shares of Bank of Baroda rose around 4%, while stocks like UCO Bank, PSB, Central Bank and Canara Bank rose over 2%.
Shibani Sircar Kurian of Kotak Mahindra AMC said: “Within the PSU banks, there are specific choices where some of the larger PSU banks are better positioned to benefit from both the pick-up in credit growth, especially on the retail front and from the bottoming out of margins as your cost of deposits starts to express itself in terms of lower cost of funds, and these banks, which have a better retail liability franchise, are well positioned.”
Master Capital’s Vishnu Kant Upadhyay added that “several major PSU banks are showing bullish price structures,” with “several names registering fresh breakouts, indicating potential for new all-time highs.” He noted that any short-term corrections could be “opportunities to accumulate in the medium to long term.”
But can the rally last?
Not everyone is convinced that this momentum will last. Seshadri Sen of Emkay Global warned: “PSU banks are poised for a strong second half of FY26, but the momentum will dissipate in FY27E.”
“Credit growth will accelerate on the back of overall market momentum, but with limited deltas. On the other hand, the decline in government bond revenues and high operational growth on the back of a new wage deal would lead to lower ROAs and ROEs for most PSU banks. The relatively attractive valuations lack long-term revaluation, and we see no case for a long-term investment thesis,” Sen said.
Sen said that “even short-term trading in the second half of FY26 will be at risk if long bond yields rise, which is a real possibility if tax collections remain substandard.”
For now, the 7% weekly gain suggests optimism is rising, with foreign investors returning, policy signals turning supportive and fundamentals improving. But as the sector’s rally continues, investors are faced with the question that could define the next phase: Is this the start of a lasting revaluation, or another fleeting burst of enthusiasm for India’s state-owned banks?
Also read | FIIs increased holdings in state-owned banks in the September quarter. Is the smart money betting on a breakout?
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times)
#PSU #lenders #rise #week #forces #rally #time #buy