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Significance of RBI Monetary Policy Decision for Equity Investors
Understanding the June 2025 RBI Policy Shift
On June 6, 2025, the Reserve Bank of India delivered a decisive monetary policy shift with wide-reaching consequences across asset classes. The central bank cut the repo rate by 50 basis points, bringing it down to 5.5%, andcut the Cash Reserve Ratio CRR by 100 basis points, freeing up an estimated ₹2.5 lakh crore in banking system liquidity.
This policy stance is not just a signal of easing financial conditions, but a strategic move with critical implications for equity market valuations, investor strategy, and portfolio positioning.
Lower Rates = Lower Discounting of Future Earnings
One of the most direct channels through which interest rate cuts affect equities is through valuation mechanics. As bond yields fall, the discount rate used to value future earnings of companies declines. This makes the present value of future cash flows higher, thereby increasing equity valuations.
Historical relationship between 10 year g-sec yields and PE multiple over past 16 years
| Nifty 50 Trailing PE | Average 10-Year Bond Yield |
|---|---|
| 17.7 | 8.2% |
| 29.6 | 6.7% |
With bond yields now trending around 6.2–6.3%, the market could support a forward PE multiple of 20–21, instead of historical average forward PE multiple of 19.6. That translates into a broader re-rating of equity markets.
Liquidity Boost Enhances Market Momentum
The CRR cut is expected to release ₹2.5 lakh crore into the banking system, significantly boosting lending capacity. This is critical for both consumers and corporates:
Borrowers will benefit from lower lending rates, encouraging consumption and investment.
Banks will face pressure to lower deposit rates, pushing savers to consider riskier, higher-return alternatives—primarily equities.
This environment of abundant liquidity and falling interest rates tends to fuel equity markets, especially in rate-sensitive areas.
Fair Value Re-Rating of Nifty 50
The June report estimates that with falling bond yields, the Nifty 50’s fair value for March 2026 could rise to:
Expected EPS (FY27): ~ ₹1,400
Forward PE Range: 20-20.5
Nifty Fair Value Target: ~28,000 to 28700
Current Nifty (as of June 2025): ₹25,003
This suggests a potential upside of 12–14% over the next 9–10 months.
For long-term investors, this isn’t just a short-term trade,it validates continued equity allocation in portfolios.
Strategic Allocation Still Holds Relevance
In light of the policy shift and expected equity gains, the strategic asset allocation remains unchanged:
- 65% in Equities
- 35% inStructured Products or Debt-like instruments
Investors already aligned to this strategy should hold positions without alterations. For those entering now or deploying fresh capital, they can fill existing allocation gaps and stay invested.
FAQs
A repo rate cut lowers borrowing costs across the economy. As interest rates fall, corporate profits may improve due to cheaper financing, and equity valuations rise because future cash flows are discounted at a lower rate.
Bond yields and equity valuations share an inverse relationship. Lower yields reduce the opportunity cost of investing in equities, pushing investors toward riskier assets. They also increase the present value of future earnings, thereby raising PE multiples and stock prices.
If you’re under-allocated to equities as per your financial goals, this could be a good time to align your portfolio. However, decisions should be based on your long-term goals, risk appetite, and current strategy—not just one event.
Monetary policy impacts typically unfold over 6 to 18 months. The current rate cuts and liquidity easing may support equity valuations and broader economic recovery through FY26, barring global shocks or domestic inflation surprises.
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