PSU Banks Suffer Up to 5% Decline as Bond Yields Surge

PSU Bank Stocks Decline Amid Rising Bond Yields and Fiscal Pressures

Key Highlights

• The Indian 10-year bond yield surged to 6.9%, its highest level since July 2024, driven by a combination of fiscal pressures, energy shocks, and heavy debt supply.
• Bank of Baroda emerged as the top laggard, falling 4.8% to ₹259.5 apiece, followed by Canara Bank, Punjab National Bank, Punjab & Sind Bank, and UCO Bank, all of which declined over 4%.
• The Nifty PSU Bank index dropped 3.6% to an intraday low of 8,266, dragging the index down 3% so far in 2026 and nearly 17% from its recent peak.

Market Reaction

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The recent excise duty cut on petrol and diesel has heightened concerns over the fiscal deficit and long-term fiscal sustainability, further raising investor anxiety. Rising bond yields may have a limited direct impact on banks' net interest margins, but they could weigh on treasury performance, leading to mark-to-market losses on available-for-sale and trading portfolios.

Economic Backdrop

The government's proposed record gross market borrowing of ₹17.2 lakh crore for FY27 and elevated crude oil prices, driven by the ongoing US-Israel-Iran conflict, are expected to remain elevated, leading to higher government borrowing and reduced policy rate cuts.

PSU Bank Performance

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Seven of the 15 constituents of the Nifty PSU Bank index have declined between 10% and 21% so far in 2026, with Punjab & Sind Bank falling the most, down 21% to ₹21.87.