The Indian government is set to more than double the foreign direct investment (FDI) cap in public sector banks from around 20% to 49%, marking a landmark financial sector reform. Currently under discussion between the Finance Ministry and the Reserve Bank of India (RBI), the proposal aims to attract global capital, strengthen balance sheets, and enhance operational efficiency while ensuring the government retains majority control with at least 51% ownership.

The move is part of a broader agenda to modernize public banks, which control over half of India’s banking assets but trail private peers in profitability and technology adoption. By aligning FDI limits closer to the 74% allowed in private banks, the reform seeks to reduce reliance on government recapitalization and infuse global best practices. Officials confirmed that both direct and portfolio investments will qualify, with individual shareholder voting rights likely capped at 10% to safeguard strategic control.

Analysts view the proposal as a game-changer for major state-owned lenders like State Bank of India, Bank of Baroda, and Punjab National Bank. Increased foreign participation could accelerate credit growth, particularly in infrastructure and MSMEs, while improving governance and risk management. Shares of public sector banks surged on the news, reflecting strong market optimism.

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Detailed guidelines will follow RBI consultations, with safeguards to prevent undue influence. The reform is expected to ease capital constraints and support India’s expanding credit demand, but success hinges on robust governance frameworks and investor confidence in regulatory clarity.

If implemented, the 49% FDI cap will not only revitalize public banking but also signal India’s commitment to financial liberalization—balancing growth, stability, and sovereign control in a rapidly evolving economic landscape.

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