Indian Bank, PNB Shares Fall Up to 6% as Government Denies Proposal to Raise FDI Limit; Nifty PSU Bank Index Slides Over 3%

Mumbai | December 3 – Shares of public sector banks retreated sharply on Wednesday after Pankaj Chaudhary, Minister of State for Finance, dismissed speculation that the government is considering an increase in the foreign direct investment (FDI) limit for public sector banks (PSBs). The clarification triggered a swift unwinding of positions across the PSU banking space, halting the rally that had gathered momentum on the back of earlier reports hinting at a possible policy shift.

By 11:30 am, the Nifty PSU Bank index had fallen more than 3% to 8,257.40, with every constituent trading lower. The decline marked the second consecutive session of weakness, reversing the optimism that briefly lifted the sector earlier in the week.

Government Clarification Pulls Down PSU Bank Stocks

Chaudhary’s written response in the Rajya Sabha unequivocally stating that the government has no proposal to raise the FDI ceiling in PSBs above the current 20% – effectively punctured market expectations that foreign capital could soon play a larger role in India’s state-owned banking system. His remarks also contrasted sharply with an October Reuters report that suggested the Centre was evaluating a plan to allow up to 49% foreign ownership in PSBs.

The minister’s comments followed a similar clarification issued in the Lok Sabha a day earlier, where he ruled out any immediate plan for mergers or consolidation among public sector lenders. Together, the statements removed two of the key speculative triggers that had bolstered PSU bank stocks in recent trading sessions.

The sell-off was led by Indian Bank, whose shares fell nearly 6%, the steepest decline in the pack. Punjab National Bank also dropped about 4%, while Bank of India, Bank of Baroda and Canara Bank slid more than 3%. Mid- and small-sized lenders did not escape the pressure, with Union Bank, UCO Bank, Central Bank of India, and Punjab & Sind Bank all losing over 2%. Even heavyweight State Bank of India, typically more resilient due to its scale and diversified book, slipped close to 2%.

FDI Rules: No Change in Framework

To clarify the regulatory backdrop, the FDI rules for banks remain exactly as they stood before the speculation began:

• Public sector banks (PSBs): FDI capped at 20%
• Private sector banks: FDI permitted up to 74%
• Up to 49% in private banks is allowed through the automatic route
• 49-74% requires government approval
• Under RBI’s Master Directions, acquiring 5% or more in any bank requires prior approval from the central bank

These rules ensure oversight and prevent excessive concentration of ownership in a sector considered strategically important.

PSU Banks Post Record Q2 FY26 Earnings

Despite the sell-off, sector fundamentals remain strong. Public sector banks delivered their best-ever quarterly profit in Q2 FY26:

• Cumulative profit: ₹49,456 crore
• YoY growth: 9%, compared with ₹45,547 crore a year ago
• Absolute increase: ₹3,909 crore
• SBI’s contribution: ₹20,160 crore (nearly 40% of sector earnings)
• Supported by: improved asset quality, stable net interest margins, lower credit costs

The earnings performance underscores the structural improvements made by state-run lenders over the past few years.

Bottomline

With the government ruling out an FDI hike and signalling no immediate consolidation moves, the market has recalibrated its expectations for PSU banks. While the absence of a policy catalyst may limit near-term upside credit growth, capital adequacy, and asset quality metrics remain supportive for the medium term.

For now, the trajectory of PSU bank stocks is likely to be shaped by earnings performance rather than speculation around regulatory or ownership changes.