PSU bank stocks have witnessed a strong correction in the recent market decline. The benchmark NIFTY PSU Bank index has declined in 8 out of the 12 trading sessions so far this month and is witnessing its worst monthly fall since September 2020.
The NIFTY PSU Bank index has fallen nearly 15% this month but recovered some ground in the last few trading sessions amid gains in broader markets. Amid this fall, three PSU banks, Punjab & Sind Bank, Indian Overseas Bank, and UCO Bank also hit their 52-week low.
| Index name | Fall in March 2026 |
|---|---|
| NIFTY PSU Bank | ▼ 12.6% |
| NIFTY Financial Services | ▼ 7.4% |
| NIFTY Bank | ▼ 9.1% |
| NIFTY50 | ▼ 8.8% |
As seen from the above table, the NIFTY PSU Bank index has seen a strong decline compared to other banking indices. In the past few years, PSU banks have given consistent returns to investors, rising over 188% in the last five years, driven by strong loan book growth, improved asset quality and dividends. However, PSU banks are witnessing a major meltdown in recent weeks due to rising bond yields.
The yield on India's 10-year benchmark bond rose to around 6.72%, extending gains for the fourth consecutive session due to surge in oil prices following the Middle East crisis and rising conflict between the US, Israel and Iran. Besides this, weak Indian rupee and sustained foreign portfolio outflows has also impacted the bond yields.
How does rising bond yield impact PSU Banks?
Fundamentally, there is an inverse relationship between bond prices and yields. So when the yield on a 10-year government bond rises, the prices of existing bonds fall as they move in opposite directions. This happens because older bonds are being offered at a fixed interest rate, and new bonds are offering higher yields. As a result, investors mostly prefer new bonds because of higher interest components. But at the same time, prices of older bonds (lower-yield) drop to attract buyers and stay competitive.
For example, if an old bond pays 7% interest and new bonds offer 7.5%, the old bond becomes less attractive, so its market price declines to make it more attractive.
This situation negatively impacts the banking sectors, especially PSU Banks like State Bank of India, Bank of Baroda, Punjab National Bank and others because they hold a large portion of their assets in government bonds in Available For Sale (AFS) form. When bond prices fall, the value of their holdings decreases, leading to mark-to-market (MTM) losses for the banks, which affects their treasury income and impacts their profitability.
Returns of leading PSU banks
| Stock name | Fall in March 2026 | YTD return |
|---|---|---|
| State Bank of India | ▼ 11.4% | ▲ 8.2% |
| Union Bank of India | ▼ 12.1% | ▲ 15.6% |
| Bank of India | ▼ 13.6% | ▲ 5.8% |
| Bank of Maharashtra | ▼ 15.1% | ▲ 3.2% |
| Bank of Baroda | ▼ 12.1% | ▼ 4.3% |
| Punjab National Bank | ▼ 12.4% | ▼ 8.3% |
| Canara Bank | ▼ 12.5% | ▼ 11.1% |
Major PSU bank stocks saw a sharp correction in March 2026, with all major banks falling between 11% and 15.1%. Shares of State Bank of India, Union Bank of India, Bank of India and Bank of Maharashtra has given positive return on year-to-date (YTD) basis but have fallen significantly so far this month indicating continued selling pressure because of rising bond yield, fall in broader markets.
Besides rising bond yields, fear of lower growth in loan book is also taking investors away from the PSU bank stocks. The US, Israel and Iran conflict could led to higher domestic inflation due to surge in oil prices, which could hit India's growing consumption economy and indirectly lower demand for new loans. Hence, investors will be closely monitoring the upcoming Q4 quarterly business updates of PSU banks to get idea about future growth prospects.
Report by Upstox
