LIC Is Buying PSU Banks While FIIs Buy Privates: Who’s Right?

Life Insurance Corporation of India (LIC), the country’s largest institutional investor with an equity portfolio exceeding ₹16 lakh crore, has taken a decisive turn in its banking exposure.

During Q2 FY26, the insurer reduced its holdings in major private sector banks while sharply increasing its stakes in the State Bank of India (SBI) and Yes Bank. This strategic tilt toward public sector lenders at a time when PSU banks are leading market performance.

The move comes amid contrasting trends as domestic institutional investors show confidence in government-backed banks, while foreign investors pour capital into India’s private banking sector. Is LIC’s big bet on PSU banks a long-term shift or a short-term play?

Portfolio Rebalance: From Private Heavy to Public Leaning

According to exchange data compiled by Prime Database, LIC made a series of large-value transactions in Q2 FY26 that significantly reshaped its banking exposure. The insurer purchased 6.41 crore shares of SBI, worth an estimated ₹5,285 crore, and quadrupled its holding in Yes Bank, moving from under 1% in June 2025 to about 4% by the end of September.

In parallel, LIC trimmed stakes in several top-tier private lenders:

• HDFC Bank: ₹3,203 crore
• ICICI Bank: ₹2,461 crore
• Kotak Mahindra Bank: ₹2,032 crore

The sell-off reduced total insurance holdings in these three private banks by about 8–10% quarter-on-quarter. It also marked LIC’s steepest pullback yet from India’s leading private lenders.

Market experts view this as a classic rotation from richly valued private banks to more attractively priced public sector names. VK Vijayakumar of Geojit said, “The PSU banking space has remained resilient and still offers value in a market where most sectors appear expensive. With bank consolidation and improving credit growth, the upside potential in larger PSU banks looks stronger.”

Beyond banking, LIC has continued its pattern of tactical value-based investing. The insurer raised holdings in 68 NSE-listed companies during Q2, typically in stocks that had seen an average 5.5% price decline. Conversely, LIC booked profits in 94 companies where valuations had stayed firm, showing a careful and selective approach instead of buying everything in sight.

Are Institutional Investors Moving in Opposite Directions

LIC’s rebalance contrasts sharply with foreign investor positioning. Overseas institutions have injected over $14 billion into India’s private banking sector in 2025 alone, underscoring the divergent views on value and growth across investor classes.

Key foreign investments include:

• Emirates NBD bought a 60% stake in RBL Bank, investing about $3 billion.
  
• Sumitomo Mitsui lifted its shareholding in Yes bank to 24.2% after putting in $1.6 billion.
  
• • Blackstone picked up nearly a 10% stake in Federal Bank, with an investment of around ₹6,196 crore.
    

This contrast, LIC’s pivot to PSUs and foreign inflows into private banks, highlights how different investor segments are interpreting the same macro signals. While FIIs continue to favour established private lenders for their steady profitability, LIC appears to be positioning for a medium-term valuation catch-up in the state-run space.

Do Valuations and Policy Support Favour PSU Banks

Analysts suggest LIC’s strategy aligns with improving fundamentals and policy support for PSU banks. Over the past three months, the Nifty PSU Bank index has rallied over 21%, significantly outperforming the Nifty Bank index, which is up just over 4%.

Adding to the optimism for public sector banks, the government is reportedly considering raising the foreign investment limit in PSU banks to 49%, more than double the current cap.

If implemented, analysts at Nuvama estimate this could bring up to $4 billion in passive inflows into the segment. Such a policy shift could help deepen liquidity, improve governance standards, and make PSU banks more competitive in attracting global investors.

Neeraj Dewan, Director at Quantum Securities, believes optimism around the PSU pack is justified but warns of narrow room for disappointment. “Expectations are already high. Even a slight miss in performance could trigger near-term corrections,” he said.

Conclusion

LIC’s portfolio pivot underscores a calculated confidence in India’s state-owned banks, a space that was once seen as lagging but is now regaining investor trust through better earnings visibility and structural reform. The insurer’s move stands in contrast to global investors’ preference for private lenders, showing that India’s banking story now has two parallel narratives: one built on stability and scale, the other on growth and efficiency.

As PSU banks continue to outperform and policy support builds, the key question is whether LIC’s contrarian call marks the start of a longer-term re-rating for India’s public sector lenders, or just a well-timed rotation in a fast-evolving market.

References

Economic Times