The Nifty PSU Bank index has shed over 17% from its February peak as war-driven risk-off trade, a weakening rupee, and global uncertainty hammer public sector lenders, but Friday’s RBI policy moves are changing the calculus for some analysts.
🔑 Key Takeaways
- The Nifty PSU Bank index has fallen over 17% from its 52-week high of 9,919 hit in February 2026; SBI, PNB, Bank of Baroda, and Union Bank are individually down 17–21% from their record highs.
- India scrapped long-term capital gains tax on FII investments in government securities via an ordinance issued Friday, a direct measure to attract foreign bond inflows.
- RBI Governor Sanjay Malhotra expanded the Fully Accessible Route (FAR) to cover new issuances of 15-, 30-, and 40-year government bonds, widening the door for FPI participation.
- RBI will bear the hedging cost on FCNR deposits, which are also exempt from CRR/SLR requirements, analysts say this protects bank margins from deposit mobilisation pressure.
- Analysts are not uniformly bullish: preference is for banks with strong deposit franchises, high CASA, clean provision cover, and comfortable capital adequacy over weaker beta plays.
How Far PSU Banks Have Fallen
The Nifty PSU Bank index hit a fresh 52-week high of 9,919 in February 2026 and has dropped over 17% since. At the stock level, the damage is sharper: SBI, Bank of Baroda, Union Bank of India, and Punjab National Bank have each fallen 17–21% from their individual record highs.
The triggers are a combination of the ongoing US-Iran war, a weakening rupee, and broader risk-off sentiment that has hit rate-sensitive and macro-exposed sectors hardest.
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What RBI Did on Friday
The Reserve Bank of India announced a set of measures on Friday specifically designed to attract foreign capital into Indian government securities and stabilise the rupee without using interest rates as the primary tool.
The headline move: India scrapped the long-term capital gains tax on FII investments in government securities through a Friday ordinance.
RBI Governor Sanjay Malhotra also expanded the Fully Accessible Route (FAR), through which foreign investors can buy Indian G-secs without any limit, to now include new issuances of 15-, 30-, and 40-year bonds.
Additionally, the RBI announced it will bear the hedging cost on FCNR deposits, which are also exempt from CRR and SLR requirements.
What This Means for Bank Margins
Sunny Agrawal, Head of Fundamental Research at SBI Securities, said stability in the dollar-rupee exchange rate and bond market inflows are positive for the banking sector broadly, with the narrative of a rate hike now firmly on the back burner.
On the FCNR measure specifically, Agrawal noted that since the hedging cost will be borne by the RBI and the deposits are exempt from CRR/SLR, bank margins should not come under pressure from mobilising these deposits.
Not a Blanket Buy Signal — Analysts Urge Selectivity
Harshal Dasani, Business Head at INVasset PMS, offered a more measured view. He acknowledged that RBI’s currency-support measures are positive but said they do not change the cycle overnight.
In his assessment, the central bank’s message is that it wants to attract foreign capital and stabilise the rupee without using interest rates as a blunt instrument, and calmer currency markets typically mean less stress on bond yields, better treasury sentiment, and lower macro uncertainty for banks.
However, Dasani was explicit that this is not a blanket bullish signal for every PSU bank. Crude prices, dollar strength, and foreign flow trends remain live risks.
His preference is for quality over momentum, specifically banks with a strong deposit franchise, high CASA base, comfortable capital adequacy, cleaner provision cover, and diversified loan growth.
He added that if the rupee stabilises and bond yields soften, PSU banks could see tactical support, but a durable rerating will still depend on credit costs, deposit growth and margin discipline.
Which PSU Banks Analysts Are Watching
Agrawal at SBI Securities highlighted that banks with large foreign exposure stand to benefit most in the short to medium term from the RBI’s measures. He specifically named Bank of Baroda, Bank of India, Canara Bank and PNB as key beneficiaries.
His top picks within the PSU bank basket are Bank of Maharashtra, Indian Bank, J&K Bank and Bank of Baroda.
Dasani’s framework points toward the largest and best-capitalised PSU franchises over weaker names that are moving primarily on improved liquidity rather than balance-sheet strength.
Bottom Line
PSU bank stocks have taken a meaningful hit from their February highs, and Friday’s RBI measures, LTCG scrapping on G-secs, FAR expansion, and FCNR hedging cost absorption, are a genuine positive for the sector’s macro environment. But analyst consensus is clear: this is a stock-picker’s setup, not a sector-wide recovery trade.
Banks with strong fundamentals, clean books, and high CASA are the preferred entry points. Watch rupee stability and the trajectory of bond yields as the two variables that will determine whether Friday’s RBI moves translate into a sustained PSU bank rerating.
Analyst views sourced from Sunny Agrawal, Head of Fundamental Research, SBI Securities, and Harshal Dasani, Business Head, INVasset PMS. Index and stock data sourced from NSE. RBI measures are sourced from the RBI Governor’s Friday announcement. All figures as of June 9, 2026. This article is for informational purposes only and does not constitute investment advice.
