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Escalating tensions in West Asia have stalled the powerful rally in India’s public sector stocks, erasing about ₹6 trillion in market value and triggering a broad-based correction after a multi-year surge.

Since 27 February, when the conflict in the region intensified, the Nifty 50 has dropped about 8% as crude oil prices climbed past $100 a barrel, fuelling global risk aversion.

The BSE PSU index, which hit its 52-week high of 22,560.74 on 26 February, has declined nearly 8% since then. Even so, the 60-stock index has held up slightly better than the broader market this year, rising about 1.5% year-to-date while the Nifty 50 is down roughly 10% over the same period.

The shift in sentiment is reflected in market capitalisation. A Mint analysis of BSE data shows the combined market value of PSU companies has declined nearly ₹6 trillion in recent weeks, falling from about ₹69.7 trillion on 26 February 2026.

The correction follows an extraordinary rerating in the sector over the past few years. PSU market capitalisation more than tripled from ₹22.1 trillion in 2022 to nearly ₹70 trillion by February 2026, driven by stronger balance sheets, improving earnings and sustained policy support.

Despite the recent pullback, PSU companies remain prominent in India’s equity market. Their share of total BSE market capitalisation has nearly doubled, from just over 8% in 2022 to 14.9% as of 26 February 2026, and has slipped only marginally to 14.8% since.

The weakness has been widespread rather than stock-specific. Between 27 February and 17 March, PSU stocks recorded a median fall of roughly 8%, suggesting that the sell-off has been broad-based rather than confined to a few stocks.

“The recent fall in PSU stocks appears more like a healthy consolidation than a structural breakdown. After a sharp multi-year rally that nearly tripled valuations, several pockets were beginning to price in near-perfect conditions—strong earnings, stable crude and continued policy support,” said Harshal Dasani, business head at Invasset PMS.

“The ₹6 trillion erosion in market cap and the 7–8% average decline suggest that excess froth is being unwound. Importantly, fundamentals across PSU banks, defence and energy remain intact, indicating this is a valuation reset rather than the end of the PSU rerating cycle,” he added.

An analysis of about 60 PSU stocks since geopolitical tensions escalated on 27 February shows that nearly 80% of the stocks, around 48 companies, have declined. About 24 stocks have fallen more than 10%, another 13 declined between 5% and 10%, and roughly 11 slipped between 0.1% and 5%.

Oil marketing companies have been among the worst hit as rising crude prices weighed on sentiment. Shares of Bharat Petroleum Corp. have fallen more than 22% since tensions escalated, while Indian Oil Corp. and Hindustan Petroleum have declined around 21%.

Public sector banks have also seen profit-booking after a strong rally. Bank of Maharashtra has slipped more than 16%, while Uco Bank, Canara Bank, Bank of India and Punjab National Bank have declined 13–15%.

“There has been a general correction in banks. PSU banks have rallied more, and therefore the correction in PSU banks is slightly sharper than in private banks,” said Kuunal Shah, fund manager at Carnelian Asset Management & Advisors.

He added that more liquid stocks and those with higher FPI ownership are often sold first during periods of uncertainty. However, the fundamental backdrop remains stable, with bank credit growth inching up to around 14% and PSU lenders continuing to gain market share from private banks.

Valuations for the PSU basket, however, remain relatively moderate. The BSE PSU index currently trades at a trailing price-to-earnings (P/E) ratio of about 11.4 times, while its one-year forward P/E is around 10.4 times and its two-year forward P/E is roughly 10.2 times.

PSUs anchor India’s dividend landscape, consistently delivering value to shareholders. BSE PSU companies distributed about ₹1.4 trillion in dividends in FY25, accounting for roughly 27% of the total dividends paid by all BSE-listed firms, according to Capitaline data.

In FY24, these companies had paid around ₹1.5 trillion in dividends, representing about 32% of the overall dividend pool.

The BSE PSU index currently offers a dividend yield of about 2.7%. According to Bloomberg, the one-year forward dividend yield stands at about 14.5%, while the two-year forward dividend yield is roughly 15.5%.

Separately, the government received around ₹74,140 crore in dividends from central public sector enterprises in FY25. It has budgeted about ₹71,000 crore from PSU dividends for FY26 and estimated roughly ₹75,000 crore for FY27.

“PSU dividends remain structurally supported, but FY25 levels are unlikely to be a clean benchmark going forward,” Dasani said, noting that payouts could become more uneven as companies balance government expectations with reinvestment needs.

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