Shares of PSU Bank are plunging after the government rules out an increase in foreign direct investment

MUMBAI: Shares of PSU Bank fell over 5% on Wednesday after the finance ministry clarified that it is not considering any proposal to increase the foreign direct investment (FDI) limit in state-run lenders from 20% to 49%, Our Bureau reports. Analysts said valuations may not be cheap after the recent surge and further profit bookings are likely at state lenders.

Indian Bank fell 5.5%, while Punjab National Bank and Canara Bank tumbled 4.3% and 3.8% respectively. Bank of Baroda and Punjab & Sind Bank fell more than 3% each.

This clarification put an end to market speculation and investor expectations regarding a possible increase in the FDI ceiling, analysts said.

“The news prompted broad-based sales and profit booking across the sector as investors who had priced in the possibility of higher foreign inflows adjusted their positions,” said Om Ghawalkar, market analyst at Share.Market (PhonePe Wealth).

Technically, a mild correction was expected as the sector had become somewhat overextended, and the current price action indicates a healthy phase of consolidation or profit booking, he said.

All twelve shares of PSU Bank in the Nifty PSU Bank retreated, dragging the price down over 3%. “After the recent run-up, the valuations of the smaller PSU banks are not very cheap compared to historical valuations,” said Christy Mathai, fund manager of Quantum Mutual Fund.

Some of these smaller PSBs may not be well managed and require caution, but the bigger banks are safer, he said. In the last three months, the Nifty PSU Bank index rose 19.3%, while benchmark Nifty moved 5.1% higher. According to some analysts, PSU banks have posted strong numbers and we expect this momentum to continue in the coming quarters, both in terms of growth and margins. “While the segment has witnessed a substantial rally, stable operating performance could continue to support valuations, making any dip an opportunity for investors,” said Vishal Narnolia, AVP – Research, ICICI Direct.

The Nifty PSU Bank index has risen 26.2% so far this year, while benchmark Nifty has risen 9.9% in the same period. On the technical front, the Nifty PSU Bank index could see a further decline towards the 7,300 to 7,500 levels before finding support and possibly resuming its uptrend. “The 50-day moving average (DMA) for individual PSU bank stocks is now a crucial level to monitor,” Ghawalkar said. “Sustained price action above the 50 DMA will be crucial for confirming underlying strength and continuing the structural rally.”