SBI, BoB, PNB, Canara, Union, Indian Bank: 20-30% rally, $3.5 bn MSCI inflows ahead?

State-run lenders such as State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Canara Bank, and Union Bank of India could together attract about $920 million in passive MSCI inflows if the foreign institutional investor (FII) limit in public sector banks is raised to 26 per cent from the current 20 per cent, according to Nuvama Alternative & Quantitative Research.

The inflows could swell to nearly $3.5 billion if the limit is increased to 49 per cent, the brokerage said.Indian Bank, which is currently not part of MSCI indices, could see $274 million in passive inflows on fresh inclusion if the FII limit is raised to 26 per cent, and as much as $459 million if lifted to 49 per cent.

Reuters recently reported that the Indian government is considering allowing direct foreign investment in state-run banks of up to 49 per cent, more than double the current limit. This follows a September 24 report by The Economic Times suggesting a similar move, with the October 27 Reuters update reinforcing that such a policy shift appears increasingly likely.

Nuvama noted that speculation about a potential FII limit hike has circulated for several years, though its timing remains uncertain.The brokerage said it is difficult to assign a definitive timeline for implementation, as the proposal may take a few quarters to clear, with MSCI reflecting higher headroom only after the rule takes effect.

However, it added that even before actual inflows materialise, PSU bank stocks could rally 20–30 per cent in anticipation of such a development.

“From a passive flows standpoint, the key impact would come via MSCI indices if the change goes through,” Edelweiss said.

FII holdings across PSU banks currently range between 4.5 per cent and 12 per cent. Though the existing 20 per cent cap has not yet become restrictive, even a modest increase to 26 per cent could trigger meaningful inflows. A move to 49 per cent, Nuvama said, would likely prompt MSCI to adjust weightings in phases across multiple review cycles.