How India’s Risk-Free Rate Affects Business Valuation
Through early 2026, the Reserve Bank of India cut its repo rate twice, bringing it down to 5.25% by April. Anyone expecting India's risk-free rate for valuation purposes to fall in step would have been wrong. The 10-year G-Sec yield — the actual benchmark valuers use — instead climbed back above 7%, touching multi-year highs later in the year on fiscal supply pressure, global yield movements, and renewed inflation concerns. This gap between the policy rate and the actual risk-free rate used in valuation is exactly the kind of detail that trips up a model built on outdated assumptions.
Why the Repo Rate Isn't the Risk-Free Rate
A common shortcut in Indian valuation work is treating the RBI's repo rate as a proxy for the risk-free rate. It isn't. The repo rate is the rate at which the RBI lends to commercial banks i.e. a monetary policy tool. The risk-free rate used in CAPM and WACC calculations is properly drawn from the yield on long-term Government Securities, most commonly the 10-year G-Sec, since this reflects what the market is actually willing to accept for lending to the government over a period matching a typical valuation's time horizon.
2026 has been a clear demonstration of why this distinction matters. Despite the RBI cutting rates, the 10-year G-Sec yield has moved higher across several stretches of the year, driven by heavy government bond supply, elevated global yields, and periodic spikes in oil prices tied to geopolitical tensions. A valuer using the repo rate as a stand-in for the risk-free rate would have badly misread the direction the actual discount rate needed to move.
How This Flows Into a DCF Valuation
Under CAPM, cost of equity starts with the risk-free rate, and a rise in the G-Sec yield increases cost of equity directly, holding beta and equity risk premium constant. This flows through WACC into the discount rate applied across the entire projection period, and disproportionately into terminal value, which typically represents the majority of a DCF valuation's total figure.
A discount rate created with a 6.7% risk- rate compared to one created with 7.1%. A difference that has actually happened within 2026 alone. Can change a companys estimated value by a significant amount, completely separate, from anything related to the companys own results.
Why G-Sec Yields Move Independently of RBI Policy
2026 has shown several forces pulling India's long-term yields in a direction the repo rate alone wouldn't predict: a heavy government borrowing programme requiring the RBI to actively manage bond supply through open market operations, foreign portfolio investment flows responding to global yield differentials rather than domestic policy alone, and oil price volatility tied to geopolitical developments feeding directly into inflation expectations and, from there, into the yields investors demand.
This means a valuer working in India today can't simply assume that an accommodative RBI stance automatically translates into a lower discount rate. The actual market-clearing yield on government debt is the number that matters, and it can, and has, moved in the opposite direction from policy rate changes within the same year.
Practical Implications for a Current Valuation
Use the actual current G-Sec yield, not the repo rate, and refresh this figure close to the valuation date rather than relying on a rate from even a few months earlier, given how much movement 2026 alone has shown.
Match the G-Sec maturity to the valuation's time horizon. A long-duration DCF should reference the 10-year yield rather than a shorter-tenor instrument that reflects near-term liquidity conditions more than long-term expected returns.
Document the date and source of the risk-free rate used, since this is exactly the kind of assumption likely to be challenged if the valuation is questioned months later, once yields have moved again.
India's risk-free rate doesn't move in lockstep with RBI policy, and 2026 has made that point clearly. A valuation built on the assumption that rate cuts automatically lower the discount rate risks missing exactly what's actually happened this year . A falling policy rate alongside a rising, or at least stubbornly elevated, long-term government bond yield. Getting this input right means tracking the G-Sec yield directly, not inferring it from the RBI's headline decisions.
