Banking stocks mixed as FM signals review of sector reforms in Budget 2026

Banking stocks were mixed on Budget Day

Banking stocks were mixed on February 1, with private sector lenders outperforming their state-owned peers as investors parsed the Finance Minister’s capex roadmap and signals on banking reforms. Shares of Kotak Mahindra Bank led the gains, rising 1 percent, followed by marginal upticks in HDFC Bank, IndusInd Bank, ICICI Bank and Federal Bank. In contrast, PSU banks faced selling pressure, with Bank of Baroda, Punjab National Bank, State Bank of India and Union Bank of India declining by up to 3 percent.

The divergent stock performance came after Finance Minister Nirmala Sitharaman announced a 9 percent increase in capital expenditure for FY27 and flagged the government’s intent to review banking sector reforms, aligning them with the broader 'Viksit Bharat' mission. While the capex push was seen as supportive for medium-term credit growth, the lack of immediate reform clarity appeared to weigh on sentiment around state-owned lenders.

In her 9th consecutive Budget speech, Sitharaman said the government plans to set up a high-level committee on banking to review the sector’s structure, regulatory framework and preparedness for India’s next phase of economic growth. The committee’s mandate will be to ensure the banking system evolves in step with the country’s long-term development priorities.

“The banking sector today is characterised by strong balance sheets, improved asset quality and coverage exceeding 98 percent of villages across India,” Sitharaman said in her Budget address, underscoring the structural improvement seen over the past few years.

Market participants believe the proposed review could have meaningful implications, particularly for public sector banks, if it leads to governance reforms and greater alignment with global standards. “The idea is to make the sector more in line with global norms while keeping consumers’ interests at the centre. This could go a long way in making some PSU banks more investible for foreign institutional investors and mutual funds, and also pave the way for higher foreign direct investment transactions,” said Hamsini Karthik, Editor – BFSI at Moneycontrol.

So far this year, performance across banking stocks remains uneven. Shares of HDFC Bank and Kotak Mahindra Bank are down nearly 7 percent each so far in 2026, reflecting valuation concerns and moderation in near-term earnings momentum, while ICICI Bank has delivered marginal gains. In contrast, State Bank of India, Bank of Baroda, Axis Bank and Federal Bank are up around 8 percent, supported by improved asset quality and expectations of stable credit growth.

For the banking sector, the Budget 2026 wishlist remained firmly centred on growth visibility, smoother credit transmission and targeted liquidity support. Analysts note that a sustained capex push by the government would not only support loan demand across segments but also improve asset quality visibility for banks over the medium term.