RBI Policy: Impact on Valuation, Liquidity, and Borrowing Cost

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Introduction: The Triple Impact of Monetary Policy

The Reserve Bank of India's October 2025 policy stance creates a compelling narrative for market participants, particularly highlighting three critical dimensions:

- Valuation recalibration

- Liquidity enhancement, and

- Borrowing cost optimization

These interconnected forces are reshaping investment decisions across both public and private markets, with profound implications for IPO timing, equity valuations, and capital allocation strategies.

Building on this policy momentum, the RBI has maintained the repo rate at 5.5% after delivering cumulative cuts of 100 basis points in 2025.

Combined with an upgraded FY26 GDP forecast from 6.5% to 6.8% and lowered inflation projection from 3.1% to 2.6%, this monetary environment fundamentally alters the investment landscape across asset classes.

The central bank's decision creates a unique environment where the cost of capital is declining while growth prospects are strengthening, reshaping investment dynamics across both public and private markets.

Valuation Impact: The Discount Rate Revolution

RBI’s recent move to make borrowing cheaper has changed how investors decide what companies are worth. Right now, the average return investors expect from Indian stocks is about 14.2%, which is a little higher than in 2021.

But here’s the twist - even though the total expected return went up, the safe government bond rates (risk‑free rate) have actually gone down. This means the extra return investors want for taking stock market risk (equity risk premium) has become smaller.

Different industries are feeling this change differently - companies that need lots of money to run (like power or infrastructure) and those that grow fast (like tech) are seeing their cost of raising money change in very different ways -

- High-growth sectors including technology and healthcare benefit disproportionately from lower discount rates due to their longer cash flow horizons.

- E-commerce and IT/ITES sectors report the highest costs of capital, reflecting their higher risk profiles and growth expectations.

- Meanwhile, capital-intensive industries like infrastructure and real estate experience dual benefits through reduced financing costs and higher asset valuations, amplified by the RBI's decision to reduce risk weights for infrastructure lending.

Private markets are experiencing pronounced valuation effects due to their illiquid nature and longer investment horizons.

Private equity and venture capital investments typically use higher discount rates than public markets, making them more sensitive to interest rate changes.

Buyout transactions see immediate improvement in leveraged returns due to lower debt costs, while growth equity investments benefit from reduced hurdle rates for future cash flows.

Liquidity Transformation: The Funding Environment Revolution

The monetary transmission - basically, how quickly and effectively RBI’s policy rate cuts reach borrowers - has improved a lot.

Banks have already passed on about 58 basis points (0.58%) of rate benefits to new borrowers. This process is likely to get even better because RBI has added more money into the banking system, injecting ₹2.5 trillion by reducing the Cash Reserve Ratio (CRR) in four phases between September and November 2025.

For borrowers, this means loans are becoming slightly cheaper across different segments, whether it’s for businesses or individuals. For banks, this creates an upside as loan demand grows, helping them earn more through higher credit volumes - a healthy sign for the entire credit market.

At the same time, India’s fundraising environment is booming. The drop in interest rates has made low-risk investments like fixed deposits less attractive, pushing more investors toward private markets - startups, venture capital funds, and private equity.

As a result, private investments are now seen as offering higher growth potential compared to traditional debt options. This sentiment is clearly visible in India’s venture capital sector, which saw a 43% jump in total funding to $13.7 billion in 2024.

This growth reflects a strong belief in India’s economic stability and opportunities in emerging businesses. Together, these developments are creating a more vibrant investment climate - where cheaper credit, stronger banking activity, and rising private market confidence all reinforce each other, paving the way for long-term growth across sectors.

Borrowing Cost Optimization: The Financing Cost Revolution

Corporate debt markets have experienced substantial transformation with public sector banks reducing repo-linked lending rates by 50 basis points.

The loan pricing transformation directly impacts EMIs across housing, automotive, personal, and MSME loans, with a ₹45 lakh home loan generating monthly savings of approximately ₹2,848 over 20 years. Working capital benefits are particularly pronounced for MSMEs, which often operate with tight cash flows and now find it easier to raise capital at attractive rates.

Corporate bond yields have compressed by 40-60 basis points, reducing refinancing costs for established companies. The spread between AAA-rated corporate bonds and government securities ranges from 60 to 120 basis points depending on maturity, providing attractive entry points for investors.

Investment-grade corporate bond yields have fallen from elevated levels as the risk-free rate declines, with yields on 30-year bonds remaining unchanged over the past year, creating potential for value buying.

Private market borrowing costs have seen significant improvements. NBFCs are experiencing improved funding costs, enabling them to expand lending to segments underserved by traditional banks.

Private equity buyouts benefit significantly from reduced debt costs, with leverage ratios of 6-7x EBITDA becoming more sustainable due to lower interest expense. Growth capital and venture capital investments benefit from reduced hurdle rates, making high-growth, cash-burn intensive business models more viable.

The IPO Delay Phenomenon: Private Market Preference in Low-Rate Environments

India’s current low interest rate environment has created an interesting twist - instead of pushing companies to go public faster, it’s actually encouraging many to stay private longer.

With money more easily available in private markets, several firms find it cheaper and simpler to raise funds without the pressure of public listing. In fact, venture capital funding in India jumped 40% to $13.7 billion in 2024, showing how strong the private funding pipeline has become. This abundance of capital allows startups to delay IPO plans and grow privately until market conditions feel perfect.

At the same time, companies are taking advantage of valuation arbitrage - in many cases, private market valuations are higher than what similar firms are getting in the stock market, especially during uncertain periods.

However, despite these favorable monetary conditions, the IPO market’s performance has been mixed. Many companies are more careful about timing their listings, waiting for stable investor sentiment. Data also shows that PE/VC investments dropped 68% in May 2025 compared to May 2024, which suggests investors are becoming choosier about when and how they exit.

Still, even with short-term moderation in IPO activity, both analysts and investors remain confident about India’s long-term startup story. The structural growth opportunity - fueled by strong domestic demand, innovation, and rising investor interest - continues to keep confidence high in the ecosystem.

Equity Investor Benefits: Capital Cost Advantages

The decline in risk-free rates directly reduces the cost of equity capital for listed companies, with the 100 basis point reduction in government bond yields translating to similar reductions in equity discount rates.

Interest-sensitive sectors including banking, real estate, and automotive benefit directly from rate cuts through improved demand and reduced funding costs.

Growth sectors like technology and healthcare, with their longer cash flow horizons, experience disproportionate valuation benefits from lower discount rates.

Private market equity benefits are evident in the improved venture capital environment, with the 40% increase in venture capital funding reflecting the improved risk-return profile in the current rate environment.

Lower cost of capital makes growth equity investments more attractive, particularly for companies with high capital requirements but strong growth prospects.

Conclusion: A Transformative Monetary Environment

The RBI's monetary policy has engineered a transformative environment through a triple impact mechanism. The 100 basis point repo rate reduction has slashed borrowing costs across sectors, while the ₹2.5 trillion liquidity injection through CRR reductions has bolstered market liquidity. Compressed discount rates have lowered the cost of capital and lifted valuations across asset classes.

This environment reshapes investment dynamics fundamentally. Public markets benefit from cheaper capital and consumption-led growth prospects supported by the upgraded 6.8% GDP forecast.

Private markets enjoy sustained PE/VC momentum as abundant cheap funding encourages companies to stay private longer, paradoxically delaying IPOs but creating selective opportunities for well-timed exits.

Market participants must exercise strategic agility by capitalizing on current financing advantages while preparing for eventual policy normalization. The RBI's data-driven approach, combined with India's strong growth fundamentals and structural reforms, positions both public and private markets for evolving opportunities in capital allocation and wealth creation.

RBI Policy: Impact on Valuation, Liquidity, and Borrowing Cost - A Comprehensive Analysis