Why Budget Day Triggered a Selloff in PSU Banks
- 2nd February 2026
- 07:00 PM
- 3 min read
Summary
PSU bank stocks came under pressure after the Union Budget as investors reacted to higher government borrowing, rising bond yields and the lack of immediate reform clarity. Uncertainty around a proposed banking review committee and unmet expectations on FDI limits added to the cautious sentiment.Mumbai | February 2, 2026
Major public sector undertaking (PSU) bank stocks like Indian Bank, Bank of Baroda, SBI, fell sharply during Budget-day trading, with several lenders witnessing steep intraday declines. The selling pressure reflected a mix of macro concerns, policy signals and unmet market expectations, which together weighed on investor confidence in the sector
While broader markets recovered in the following session, PSU banks continued to lag. State Bank of India showed signs of stabilisation, but weakness across other PSU was seen.
PSU bank stocks had seen sharp declines on Budget Day, with selling pressure amplified by profit booking also after a strong recent rally.
The weakness in PSU banks was driven by multiple factors emerging from the Budget announcement.
Higher government borrowing spooks banks
A key trigger for the selloff was the government’s announcement of record gross market borrowing of ₹17.2 lakh crore for FY27, which exceeded market expectations.
Higher borrowing increases the supply of government bonds and typically pushes yields higher. This is a concern for PSU banks, which hold large government securities portfolios. Rising yields reduce bond prices, leading to mark-to-market (MTM) losses on treasury holdings, which can weigh on profitability.
Banking review committee adds uncertainty
Investor caution was further reinforced by the finance minister’s proposal to set up a high-level committee to conduct a comprehensive review of the banking sector.
While the review is aimed at long-term reforms under the Viksit Bharat 2047 vision, the lack of clarity on the committee’s scope, timelines and outcomes created near-term uncertainty. Historically, such reviews have raised concerns about possible mergers or changes in capital norms, which tend to act as short-term headwinds for bank stocks.
Reform expectations fall short
Sentiment was also dented by the absence of any announcement on raising the foreign direct investment (FDI) limit for PSU banks, which remains capped at 20%. Expectations of a possible hike had built up ahead of the Budget, and the lack of action led to disappointment.
Profit booking after strong rally
The Budget-day triggers coincided with profit booking, as PSU bank stocks had rallied strongly in recent months. With no immediate positive catalysts announced, investors chose to pare exposure, intensifying the selling pressure.
What lies ahead
Going forward, market participants will track bond yield movements, clarity around the proposed banking review committee, and signals from the upcoming RBI Monetary Policy Committee (MPC) meeting. Until visibility improves on reforms and borrowing pressures ease, PSU bank stocks are likely to remain volatile.
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