Public Sector Banks Defy Market Trend with Sustained Rally
India's public sector banking stocks have continued their impressive performance, extending their weekly winning streak despite broader market weakness. Leading lenders including State Bank of India, Bank of Baroda, and Union Bank of India have shown remarkable resilience as investor sentiment remains strongly positive toward these counters.
The upbeat mood is supported by multiple factors including improving fundamentals, attractive valuations, and reports that the government might significantly increase the foreign investment limit in state-run banks. This combination has created a perfect storm of positive momentum for the sector.
Individual Bank Performances Shine
Seven out of twelve constituents in the Nifty PSU Bank index finished the week in positive territory, demonstrating broad-based strength across the sector. Bank of Baroda emerged as the top performer with a 3.83% gain to reach ₹289, while other major players including Union Bank India, Canara Bank, Indian Bank, and Bank of Maharashtra followed with advances of up to 4.70%.
Adding significant weight to the rally, State Bank of India—the index's heaviest weighted stock—climbed 2% this week to ₹955.85. This marks SBI's sixth consecutive weekly gain, representing its longest winning stretch since May 2021. The consistent performance of this banking giant has provided substantial support to the overall sector momentum.
The collective strength across individual banking counters propelled the Nifty PSU Bank index to a 2.05% weekly advance, marking its third straight week of gains. This current rally builds upon the stellar comeback witnessed in March, when PSU banking stocks successfully broke out of a 10-month consolidation phase.
Fundamental Drivers Behind the Rally
Several fundamental factors are driving the sustained interest in public sector banks. The government's consumption-boosting measures, including GST rate cuts, have significantly improved liquidity conditions and strengthened the demand outlook. These policy interventions have created a more favorable operating environment for the banking sector.
Recent data underscores the improving credit trends in the system. According to the latest fortnightly figures as of October 18, 2025, system credit growth accelerated to 11.4% year-on-year, up from 10.4% YoY as of September 19, 2025. This steady recovery in lending activity indicates strengthening economic momentum and increased business confidence.
Financial analysts maintain their positive stance on banking stocks, citing the gradual improvement in credit growth, net interest margins bottoming out, and benign-to-improving asset quality across the sector. These factors collectively suggest that the current rally has strong fundamental underpinnings rather than being merely speculative.
Potential Foreign Investment Boost
A significant development that could further fuel the PSU bank rally involves potential changes to foreign investment regulations. According to a Reuters report, the Indian government is considering allowing direct foreign investment in state-run banks of up to 49%, more than double the current limits.
This potential policy shift could trigger substantial capital inflows into the sector. A report by Nuvama Institutional Equities estimates that India's state-run banks could see passive inflows of up to $4 billion if the government raises the foreign institutional investment limit to 49% from the current 20%.
Sustained Annual Performance
The Nifty PSU Bank index is on track to extend its annual winning streak to five consecutive years, having already advanced 28% so far in 2025. This makes it the best-performing sectoral index this year, highlighting the remarkable transformation in investor perception toward public sector banks.
After underperforming for three consecutive years, state-owned bank stocks staged a remarkable comeback in 2020, propelling the index to surge nearly 70% that year. The rally has maintained its momentum in subsequent years, reflecting sustained investor confidence in the sector's recovery story.
Notably, the index has delivered returns exceeding 25% in four of the last five years, including the current year. Among individual constituents, Indian Bank has been the standout performer, soaring an incredible 1,349% over five years. Other major gainers include Canara Bank, Bank of Baroda, Union Bank, Bank of Maharashtra, Punjab National Bank, SBI, and Indian Overseas Bank, each rising between 300% and 665% during the same period.
Record Quarterly Profits
The improving operational performance is clearly reflected in the latest financial results. Public sector banks reported a record cumulative net profit of ₹49,456 crore in the second quarter of FY26, representing a 9% improvement compared to ₹45,547 crore in the same period last year.
State Bank of India accounted for the largest share of these earnings, contributing 40% to the total profits. In percentage terms, Indian Overseas Bank reported the highest growth among public sector lenders, with profit surging 58% to ₹1,226 crore.
Only two banks—Bank of Baroda and Union Bank—reported a decline in net profit during the quarter. For the first half of FY26, public sector banks together earned ₹93,674 crore, up nearly 10% from ₹85,520 crore in the same period last year. This marks the first time that aggregate PSB profits have crossed the ₹90,000 crore mark, signaling a new era of profitability for the sector.
The combination of strong quarterly results, improving credit growth, potential foreign investment liberalization, and sustained investor interest suggests that the public sector banking rally may have further room to run, despite already impressive gains.
