Budget 2026 Unlikely to Spark PSU Stock Rally as Divestment Push Loses Steam

markets

• Aggressive PSU stake-sale targets unlikely in Budget 2026, say market experts
• Strategic sales, privatization drive PSU stock re-rating, not routine dilutions
• Divestment targets seen as neutral for PSU stocks due to execution challenges

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As the government readies Budget 2026 on February 1, expectations of a meaningful divestment-led rally in public sector stocks are fading. Market experts say the Centre is unlikely to announce aggressive new stake-sale targets, while routine minority stake dilutions have historically failed to trigger sustained price momentum in PSU counters. Instead, analysts argue that only large strategic sales and privatisation moves are capable of driving meaningful re-rating in the sector.

While divestment is expected to feature again in the budget narrative, investors are not positioning for broad-based PSU gains. According to market participants, incremental stake sales typically have limited impact on stock prices unless they are accompanied by structural changes in ownership or management control.

Vinit Sambre, Head of Equities at DSP Mutual Fund, said meaningful re-rating in PSU stocks usually occurs only in cases of strategic sales or privatisation. “These transactions tend to move the needle far more than routine small stake dilutions,” he said. According to Sambre, such deals improve capital discipline, sharpen execution standards and strengthen governance frameworks, creating clearer pathways for long-term value creation.

Divestment performance over recent years also highlights the execution gap. Between FY20 and FY25, proceeds ranged from Rs 38,000 crore in FY21 to about Rs 65,000 crore in FY22, consistently falling short of budgeted estimates, according to CareEdge Ratings data. Market experts note that while this reflects structural challenges in meeting targets, stock market reaction depends more on deal quality and sector valuations than headline shortfalls.

The current fiscal year has also begun on a weak footing. During April–November FY26, divestment proceeds stood at Rs 4,900 crore against a budgeted miscellaneous capital receipts target of Rs 47,000 crore, which includes Rs 18,800 crore earmarked for asset monetisation. Analysts expect several large-ticket strategic transactions to spill over into FY27, including the proposed IDBI Bank sale and the Shipping Corporation of India divestment.

The government’s large residual holdings also leave room for incremental stake sales when market conditions improve. The Centre continues to own nearly 95% of Life Insurance Corporation of India, providing scope for future monetisation through calibrated secondary offerings.

Sunny Agarwal, Head of Fundamental Equity Research at SBI Securities, flagged structural bottlenecks in the divestment process. “Divestment is heavily dependent on market sentiment and involves a long procedural timeline. Historically, the government has struggled to meet targets because there are too many moving parts,” he said. Agarwal added that investors are already aware of which PSUs are on the block. “Given the government’s track record, divestment targets should be viewed as neutral for PSU stocks,” he said.

Ashwini Shami, Founder and Managing Partner at Omniscience Capital, said sector-specific trends continue to matter more than headline divestment announcements. He noted that defence, railways and renewable energy PSUs remain in focus due to strong policy tailwinds and supportive valuations, while banks and financial services PSUs appear mispriced, suggesting selective portfolio repositioning rather than broad-based selling or buying.

Shami also pointed to the government’s relatively comfortable fiscal position, supported by rising non-tax revenues and higher-than-expected dividend transfers from the Reserve Bank of India. “From a fiscal standpoint, the government is in a comfortable position. There may not be any major fresh divestment announcements in Budget 2026,” he said.