This outperformance came amid a challenging backdrop for equities. Markets remained under pressure due to tariff-related concerns, persistent FII selling, weak earnings growth, elevated valuations, and a depreciating rupee. These challenges intensified further with the escalation of the Iran-Israel/US conflict, which spiked energy prices, accelerated foreign outflows, and reduced expectations of US Fed rate cuts to just one, down from earlier projections of multiple cuts.
Despite broader market pressures, PSU banks remained resilient, supported by improving asset quality, stronger balance sheets, and sustained credit growth. The sector also benefited from relatively attractive valuations compared with other market segments, drawing investor interest amid ongoing volatility.
Other sectors that managed to outperform included metals (23%), defence (13%) and Auto (12%), while several segments such as IT (-21%), realty (-23%), and internet (-19%) saw sharp declines, highlighting the divergence in sectoral trends.
FY2026 underscored the challenges of an uncertain and volatile global macro environment, with equity markets underperforming owing to President Trump’s tariffs from the first quarter onwards and a sharp crude oil price spike due to supply disruptions in the fourth quarter, driving cost inflation and weighing on corporate margins, said Vikrant Chaturvedi, Associate Director – Research, Brickwork Ratings.
Stock performance
The rally in PSU bank stocks was broad-based, with several lenders delivering strong double-digit returns over the past year. Indian Bank led the pack with a sharp 57% surge, followed by Canara Bank at 39% and Bank of Maharashtra at 33%. Union Bank of India and Bank of India also posted robust gains of 31% and 29%, respectively, while the country’s largest lender, State Bank of India (SBI), advanced 27%.
Among others, Indian Overseas Bank (IOB) rose 19%, whereas Bank of Baroda and Punjab National Bank (PNB) delivered relatively modest returns of 9% and 5%, respectively. However, the rally was not uniform, with laggards such as Central Bank of India and UCO Bank declining 26% and 37%, highlighting divergence within the PSU banking space.
Speed-breaker
Like most sectors, bears have finally caught up with the PSU banking sector in 2026. Its year-to-date decline is nearly 8%, accentuated by the war that has impacted the overall market fall.
Yet, it appears more resilient than the Nifty, which has plunged over 14% in the same period.
The markets remained volatile throughout the year, as the fear index India VIX shot up 120% over the past year. On Monday, it closed at 27.89.
FY27 Outlook
Rajesh Singla, CEO & Fund Manager at Alpha AMC, expects earnings growth to stabilise in the low double-digit range in FY27, supported by domestic demand and continued capex momentum.
He also sees a clear shift in the small-cap space following a sharp valuation correction from overheated levels in 2024. “This has improved the risk-reward balance, so institutional investors are starting to increase exposure again. Fund houses reopening small-cap schemes and selectively adding positions signals that confidence is returning, though in a more measured way. Historically, such corrections have often been followed by strong recoveries, but this time the approach is far more selective. Not all companies will benefit equally,” Singla said.
In his view, IT Services, OMCs, airlines, cement, and export-oriented segments will continue to witness pressure.
Chaturvedi of Brickwork Ratings expects commodities to outperform in FY2027, with base metals driven by infrastructure demand, precious metals acting as safe havens, and oil & gas supported by geopolitical risk premiums. “Equities face continued headwinds, while debt markets should offer relative stability. FY2027 will be a year of selective but constructive performance across asset classes,” Chaturvedi said.
(Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)