State-owned banks, such as Canara Bank, Indian Bank, and State Bank of India, have emerged as top picks in the Indian stock market in 2025, sharply outperforming their private peers, as investors remain optimistic that a pickup in credit growth, recovery in margins, and strengthening asset quality will continue to support earnings momentum and re-rating prospects for the sector.
Half of the constituents of the Nifty PSU Bank index have delivered returns of over 20%, with some are even on track to extend their annual rally for a fifth consecutive year.
With gains of 28% in 2025 so far, the Nifty PSU Bank index has emerged as the top-performing sectoral index, largely outperforming the benchmark Nifty 50, which has risen 10% over the same period.
Even the broader Nifty Bank index, which includes both public and private sector lenders, has trailed behind with a 16% rise, highlighting the concentrated strength in state-owned banks.
The current rally builds on the stellar comeback seen in March, when the Nifty PSU Bank index broke a 10-month consolidation phase, which further accelerated following the government’s consumption-boosting measures, including GST rate cuts that improved liquidity and demand outlook.
Meanwhile, the PSU bank gauge is also on track to extend its annual winning streak to five years. From the Covid-19 lows of 1,078, the index has surged nearly 678%, a performance that closely resembles multibagger-like returns.
Canara Bank, Indian Bank lead the rally
Among individual stocks, Canara Bank is at the forefront with a sharp surge of 49%, also putting it on track to record its biggest yearly jump since 2022. Indian Bank stands as the second-top performer amid sustained demand, a trend that has remained intact since 2021, leading to another 47% surge in 2025.
Rebounding from last year’s losses, Bank of India has delivered a solid return of 41% in 2025 so far and is on course to post its strongest annual performance since 2022.
From last year’s poor performance, Union Bank rebounded with a surge of 28%, also marking its fifth straight year of positive gains.
State Bank of India, the largest public sector bank and the most valued among its peers, has rewarded shareholders with a 23% return, pushing the bank’s market capitalisation past ₹9 lakh crore for the first time.
Other PSU banks, such as Bank of Baroda and Punjab National Bank, have also gained 21.41% and 17%, respectively, in the current calendar year so far.
Outlook remains bright
The Reserve Bank of India cut the key policy rate by a cumulative 125 basis points this year through December, and Governor Sanjay Malhotra said that transmission has been broad-based across sectors.
This is expected to be reflected in net interest margins reaching the cycle’s low in the October-December quarter for most banks, according to estimates, assuming the key rate is not cut further. Markets will now focus on how loan growth is shaping up amid the rate cuts and the government’s recent consumption tax reduction.
According to analysts, full-year loan growth is projected at 13%, while credit costs are expected to remain stable. Margin recovery-driven by cost-of-funds (CoF) normalisation due to ongoing deposit repricing and CRR cuts-is expected to be the key profit driver in the second half of FY26.
Loan growth remained strong in Q2FY26, with credit expanding 11% year-on-year, largely led by the MSME, agriculture, and corporate segments, while retail growth moderated due to slower disbursements in the unsecured and vehicle loan categories.