PSU Banks Tumble 7% After Union Budget 2026 Announcements

Introduction: A Sharp Reversal for PSU Banks

Shares of public sector undertaking (PSU) banks experienced a significant sell-off during a special trading session on Sunday, February 1, immediately following the Union Budget 2026 presentation. The Nifty PSU Bank index plunged by as much as 7%, with all its constituents trading in the red. This sharp decline was triggered by two key announcements from Finance Minister Nirmala Sitharaman: the formation of a high-level committee to review the banking sector and a record government borrowing plan for the upcoming fiscal year, which raised concerns about treasury losses for the lenders.

The Budget Day Market Reaction

The market's reaction to the budget announcements was swift and decisive for state-run lenders. Bank of India emerged as the top loser, with its stock dropping nearly 7% to trade at Rs 152.6 on the BSE. Other major PSU banks also faced heavy selling pressure. Shares of Bank of Baroda fell 4.48%, Union Bank of India declined 4.43%, and Bank of Maharashtra slipped 4.34%. The sell-off was broad-based, erasing a portion of the strong gains the sector had accumulated over the past year. The BSE PSU Bank index itself was down significantly, reflecting the widespread negative sentiment among investors.

Trigger 1: A High-Level Committee and Policy Uncertainty

One of the primary triggers for the downturn was the Finance Minister's proposal to constitute a high-level committee for a comprehensive review of India’s banking sector. This initiative is part of the government's long-term 'Viksit Bharat' vision, aimed at future-proofing the financial system. The committee's mandate will be to assess the sector's structure, regulatory framework, and preparedness for India's next phase of economic growth. While the long-term goal is to strengthen the banking system, the announcement introduced a degree of short-term uncertainty. Markets often react negatively to ambiguity, and the lack of immediate clarity on the committee's recommendations and potential structural changes weighed on investor sentiment for PSU bank stocks.

Trigger 2: Record Government Borrowing and Yield Concerns

The second major factor contributing to the sell-off was the government's announcement of a record gross market borrowing of ₹17.2 lakh crore for the fiscal year 2026-2027. This figure surpassed market expectations, which were pegged between ₹16.3 lakh crore and ₹16.5 lakh crore. Higher-than-expected government borrowing typically leads to an increase in the supply of government bonds. This increased supply puts downward pressure on bond prices, which in turn causes bond yields to rise. For PSU banks, which are significant holders of government securities, a spike in bond yields is a negative development. It leads to mark-to-market (MTM) losses on their investment portfolios, directly impacting their treasury income and overall profitability.

PSU Bank Stock Performance on Budget Day

The impact was felt across the board, with all 12 stocks in the Nifty PSU Bank index closing with losses. The table below highlights the performance of some of the key PSU lenders during the session.

A Contrast to Recent Performance

The sharp correction on Budget day stands in stark contrast to the sector's stellar performance in the preceding year. In 2025, the Nifty PSU Bank index had delivered impressive returns of over 30.5%, outperforming the broader market. This rally was fueled by improving fundamentals, including stronger balance sheets, multi-year low non-performing assets (NPAs), and healthy credit growth. The sudden reversal suggests that investors are now reassessing the sector's outlook in light of the new fiscal and regulatory landscape outlined in the budget.

Expert Analysis and Sector Outlook

Despite the market's knee-jerk reaction, some experts view the government's proposals in a positive long-term light. Varun Gupta, CEO of Groww Mutual Fund, stated that the formation of the banking committee and the restructuring of non-bank lenders demonstrate a clear intention to strengthen India's financial system. He noted that thoughtful execution of these reforms could materially improve credit delivery and resilience. However, the immediate outlook remains cautious. Analysts believe the sector may witness a period of consolidation and volatility as the market digests the implications of higher bond yields and awaits clarity on the proposed banking reforms.

Conclusion: Short-Term Pain for Long-Term Gain?

The sell-off in PSU bank stocks following the Union Budget 2026 was a direct response to heightened uncertainty and concerns over fiscal pressures. The dual impact of a proposed regulatory overhaul and a record government borrowing program prompted investors to book profits after a strong rally. While the path ahead may be volatile in the short term, the government's focus on structural reforms could lay the groundwork for a more robust, competitive, and resilient public sector banking system in the long run. Investors will be closely watching for further details on the banking committee's mandate and the trajectory of bond yields in the coming months.