Shares of public sector banks witnessed sharp selling pressure in early trade on Wednesday, with Nifty PSU Bank index falling nearly 3% amid broad-based selling in sectoral heavyweights. The sell-off was triggered after government clarified that it has no plans to raise foreign direct investment (FDI) limit in state-owned lenders.

Reacting to the news, the Nifty PSU Bank index dropped 2.8% to 8,514.90, with all 12 state-run constituents trading in the red. Indian Bank led the decline, falling 5.51% to ₹859.45, followed by PNB (-4.27%), Bank of India (-3.50%) and Canara Bank (-3.26%). Union Bank slipped 2.70%, while Central Bank of India and UCO Bank fell up to 2.5%. State Bank of India, the largest PSU lender, also declined 1.50% to ₹967.30.

Meanwhile, the equity benchmarks – BSE Sensex and NSE Nifty – were down by 0.4% each.

Minister of State for Finance Pankaj Chaudhary on Tuesday clarified that the government is not considering any proposal to raise the foreign direct investment (FDI) limit in public sector banks (PSBs) to 49%, up from the current 20%. He made this statement while responding to a written question in the Rajya Sabha regarding whether the government had proposed increasing the FDI limit in PSBs.

The question was raised in Parliament following reports suggesting that the Indian government was considering allowing direct foreign investment of up to 49% in state-run banks.

At present, foreign investors can hold up to 20% in public sector banks and 74% in private banks, with up to 49% in private banks allowed automatically. Any investment of 5% or more in a bank still needs approval from the Reserve Bank of India.

Even though the government has clarified that it has no plans to raise the foreign direct investment (FDI) limit in public sector banks (PSBs) beyond the current 20%, foreign portfolio investors (FPIs) continue to show limited interest in state-owned lenders, despite their strong financial turnaround over the past three years.

Except for Canara Bank—where FPI holding has climbed to an all-time high of 11.9%, making it the only PSB with double-digit foreign ownership—most public sector banks remain far below the existing cap. In fact, FPI stakes have declined in several major banks after peaking in FY24.

At State Bank of India, foreign ownership has slipped from 10.97% in FY24 to 9.49% in FY26, while Bank of Baroda witnessed an even sharper fall from 12.4% to 8.71% during the same period. Bank of India saw a modest decline from 4.52% to 4.24%, and Indian Bank’s FPI holdings dropped from 5.29% in FY24 to 4.68% in FY26.

While FPIs have been net sellers in Indian equities overall—driven by global risk-off sentiment, elevated US bond yields, and geopolitical uncertainties—the retreat has been more pronounced in PSBs, despite their improved asset quality, profitability, and capital positions.

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