Indian public sector bank (PSU) stocks have experienced a rally, with some shares rising up to 3% following reports of the government considering new banking reforms and expediting stake sales. This surge reflects growing investor optimism, driven by improved financial performance, policy continuity, and the potential for further reforms in the banking sector.

The government is reportedly planning to reduce its stake in select PSBs to comply with the Securities and Exchange Board of India's (SEBI) minimum public shareholding norms, which require listed companies to have at least 25% public ownership. The Department of Investment and Public Asset Management (DIPAM), in coordination with the Department of Financial Services, is said to be finalizing plans to reduce the government's stake in five banks: Bank of Maharashtra, Indian Overseas Bank, UCO Bank, Central Bank of India, and Punjab & Sind Bank. The stake sales are expected to be executed in phases through Offer for Sale (OFS) and Qualified Institutional Placement (QIP) routes, with the aim of meeting the August 2026 deadline for compliance.

This move aligns with long-standing recommendations from NITI Aayog and the Finance Ministry on reducing government ownership in non-strategic sectors. The market anticipates continued economic policy and reform focus under the new government, particularly in asset monetization and banking sector consolidation.

Several factors have contributed to the renewed investor interest in PSU banks. These include:

• Improved Asset Quality: PSU banks have shown improvements in asset quality, with declining non-performing assets (NPAs).
• Higher Lending Growth: The banks have experienced stronger lending growth, contributing to their financial performance.
• Strong Profitability Metrics: PSU banks have demonstrated strong profitability, further boosting investor confidence. In FY25, the combined net profit of the 12 public sector banks reached a historic ₹1.78 lakh crore, marking a 26% increase year-over-year.
• Policy Support: Government initiatives, such as urging state-owned lenders to monetize their holdings in subsidiaries through IPOs or strategic stake sales, have also played a role.

The Nifty PSU Bank Index has reflected this positive sentiment, outperforming the Nifty Private Bank Index. The Nifty PSU Bank Index surged 14.99% in Q1 FY26, while the Nifty Private Bank Index increased by 9.8%. This indicates a shift in investor preference towards PSU banks. Leading PSBs like SBI, Indian Bank, Punjab National Bank, and Canara Bank are expected to rally an additional 15–20% over the next six months, supported by macro tailwinds and sector-specific reforms.

However, analysts advise caution, noting that the timing and quantum of stake sales will be closely monitored due to their potential impact on stock supply and market valuations. Rising oil prices and global uncertainty could also put pressure on markets. Successful execution of the stake sale plans and clear communication from the government will be crucial in sustaining the momentum.

Overall, the rally in PSU bank stocks signifies a potential turning point for these institutions. With improved financials, government support, and a focus on reforms, PSU banks may gain the flexibility and resources needed to compete effectively in the evolving banking landscape.