PSU banks reel after Budget 2026; shares fall up to 7%: Here's why

All the PSU Bank index constituents were trading lower, with Bank of India, Bank Maharashtra, Indian Bank, Bank of Baroda, and Union Bank of India falling in the range of 3 to 7 per cent

PSU Bank stocks: Shares of India's private sector banks (PSBs) witnessed a sharp sell-off after Finance Minister Nirmala Sitharaman presented the Union Budget 2026 in parliament today, February 1, 2026. 

 

The Nifty PSU Bank index fell around 7 per cent to hit an intraday low of 8,387.95, compared to the previous session's close of 9,019.35. Around 2:00 PM, the index was trading at 8,684.95 levels, down by 334.40 points or 3.71 per cent. 

 

All the index constituents were trading lower, with Bank of India, Bank of Maharashtra, Indian Bank, Bank of Baroda, Union Bank of India, and State Bank of India falling in the range of 3 to 7 per cent. Among others, Indian Overseas Bank, Central Bank of India, Punjab & Sind Bank, Canara Bank, Punjab National Bank, and UCO Bank fell up to 3 per cent. 

Here's why PSU Bank stocks are falling:

The sell-off came after FM Sitharaman announced that the Central Government will borrow a record ₹17.2 trillion from the market in the financial year 2026-27 (FY27).

Additionally, FM Sitharaman announced a 9 per cent increase in capital expenditure for FY27 and flagged the government's intent to review banking sector reforms, aligning them with the 'Viksit Bharat' mission. 

 

According to Anil Rego, founder and fund manager at Right Horizons PMS, the sustained capex push supports medium-term credit growth in infrastructure, MSME, and working-capital financing. 

 

Additionally, Sitharaman announced that the government plans to set up a high-level committee on banking to review the sector's structure, regulatory framework and preparedness for India's next phase of economic growth. The committee will ensure the banking system evolves in step with the country's long-term development priorities. “The banking sector today is characterised by strong balance sheets, improved asset quality and coverage exceeding 98 per cent of villages across India,” Sitharaman said.

 

"PSBs may see a mixed reaction. The announcement of a high-level banking sector review committee signals potential governance and structural reforms, which could improve efficiency and investor perception over time. However, the absence of immediate recapitalisation or credit-guarantee announcements may cap sharp near-term rerating," he added.

 

Varun Gupta, chief executive officer at Groww Mutual Fund, said the announcement of a high-level committee on banking and the proposed restructuring of PFC and REC reflect a clear intent to future-proof India’s financial system for a Viksit Bharat. 

 

"Strengthening public sector NBFCs through better scale, governance and technology adoption is critical to ensuring that long-term capital reaches infrastructure and priority sectors efficiently, without compromising on financial stability or consumer protection," he added.

 

According to Gupta, a thoughtful execution of these reforms can materially improve credit delivery and resilience across the system.  Disclaimer: View and outlook shared belong to the respective brokerages/analysts and are not endorsed by Business Standard. Readers discretion is advised.