NIFTY PSU Bank index rallies nearly 12% in a month; check what is fueling the rally

PSU banks have long seen investor traction as they proved to be a safe bet for investors amid a broad-based selling pressure. When external shocks like tariff uncertainty, geopolitical tensions and the rising impact of AI have kept the benchmark indices like NIFTY50 and SENSEX under check, the PSU Bank index is touching record high levels in February. The table below shows the performance of PSU bank stocks in the last few years.

PSU Bank performance

Over a 5-year period, all the PSU banks saws gains between 50% and 600%. The NIFTY PSU Bank is also the top sectoral gainer with 11.7% returns for the past month. The strong performance by the PSU Banks is aided by multiple factors.

Robust earnings growth

At the aggregate level, the NIFTY PSU Bank index posted strongest profitability growth in the recent quarters with the aggregate net profit growth of over 18% for 12 PSU banks. The interest income grew by 4.3% YoY and the operating profit jumped 18% YoY owing to slower interest expenditure growth. At the individual level, SBI posted highest ever quarterly net profit of ₹21,028 crore. While Bank of Baroda posted 4.5% YoY jump in net profit at ₹5,055 crore, up from ₹4,800 crore in the previous quarter. The strong earnings performance by all the major PSU banks have led to strong investor interest in all the stocks.

Improving asset quality

Along with the profitability growth the PSU banks also posted a strong improvement in the asset quality during the recent quarters. According to the Finance Secretary, M Nagaraju, the gross NPA is at a record low of 2.30 % and net NPA at 3% at the end of September 2025. For the Q3FY26, SBI GNPA improved from 2.07% to 1.57%, Bank of Baroda’s GNPA improved from 2.43% to 2.04%, Bank of India’s GNPA improved from 3.6% to 2.2% and Canara Bank’s GNPA improved 126 bps to 2.08% from 3.3% in the previous year’s same quarter. PSU Banks which were grappling with high NPA in 2018-19 period have now shown a remarkable improvement in the asset quality by tightening the lending mechanism and policy measures like NCLT and bankruptcy laws.

Increasing FII interest

With robust earnings growth, strong asset quality and underperformance provided a reasonable valutions for PSU Bank index, which attracted institutional investors. Majority of the PSU Banks saw strong increase in FII ownership in the Q3FY26, while retail and domestic institutional largely maintained their existing ownership in the pie. Renewed interest by the FIIs in the PSU banks led to strong buyers interest, leading to a robust rallies in the PSU bank stocks in past few months.

PSU banks provided a safe space for institutional investors with favourable risk-to-reward ratio, which led to an influx of FII funds despite the broad-based selling in other basket of stocks. Along with improving fundamentals, credit growth is showing signs of revival with aggregate lending growth at 12% for the quarter. The Finance Secretary also expects the PSU banks' net profit to cross ₹2 lakh crore by the end of FY26, indicating that the Indian banking sector is in good shape.