RBI unlocks capital market liquidity with funding boost at a time markets are flat: Here’s how the measures would work

The measures come at a time when India’s IPO market is buzzing, with several high-profile offerings in the pipeline. By easing restrictions, the RBI aims to widen participation from retail and institutional investors, improve liquidity flows into the primary market and deepen financial intermediation.

Analysts believe the measures will boost investor confidence, particularly among retail participants who often face funding constraints. At the same time, banks will benefit from new lending opportunities backed by capital market securities. The RBI, however, has emphasised that systemic risks will continue to be managed through macroprudential tools, ensuring stability while spurring market growth.

Why these measures now?

The timing of the Reserve Bank of India’s measures is significant, as equity markets have been struggling to find momentum amid global and domestic headwinds. Trade tariff tensions with the US and curbs on H1-B visa have injected uncertainty into export prospects, while geopolitical flashpoints in West Asia and Europe have kept investors on edge.

Adding to the strain has been the sustained withdrawal by foreign portfolio investors (FPIs), who have pulled out $21 billion from Indian equities over the past year in search of safer or higher-yielding assets elsewhere.

This exodus has pressured the rupee and dampened market sentiment, leaving domestic institutions and retail investors to shoulder the burden of keeping trading volumes alive. Against this backdrop, the RBI’s relaxations on lending against shares, debt securities, and IPO financing are aimed at offsetting some of the liquidity shortfall, strengthening domestic participation, and shoring up confidence in India’s capital markets. “This move is significant, as it enables banks to recapture flows that had increasingly shifted to structured credit players,” said Chanchal Agarwal, CIO Equirus Family Office.

IPO funding to widen retail access, lift liquidity

The RBI’s relaxation in IPO financing comes at a pivotal moment for the capital markets. A series of high-profile public offerings are in the pipeline, including the much-anticipated issues of Tata Capital and South Korea’s LG group, which are expected to draw massive investor interest. In recent months, strong listing gains and upbeat corporate earnings have kept investor appetite for new issues robust, with retail and institutional players eager to participate.

By raising the financing limit, the RBI is looking to tap into this momentum and broaden access to upcoming offerings. The move is expected to bring in more retail investors who often face capital constraints, while also providing additional liquidity to the primary market. Analysts believe the timing is critical, as the regulatory boost will help channel savings into equities at a time when demand is peaking, thereby deepening India’s capital markets and supporting economic growth.

Enhancing IPO financing is likely to maintain growth momentum in the capital market and fund flow to the industry, according to Amit Bhagat, Co-Founder, CEO and MD, ASK Property Fund.

Lending against shares gets major boost

The RBI has proposed sweeping relaxations in norms governing loans against financial securities. The central bank has suggested removing the existing regulatory ceiling on lending against listed debt securities, a change that is expected to deepen market activity and enhance liquidity.

Under the revised framework, banks will be allowed to extend loans against shares of up to Rs 1 crore per individual borrower, a fivefold jump from the earlier cap of Rs 20 lakh. The RBI has also proposed raising limits on loans secured against units of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), expanding the scope of collateral eligible for bank lending. “These measures represent a significant push toward easing regulatory constraints and facilitating stronger credit growth across the financial system,” said Namrata Mittal, Chief Economist, SBI Mutual Fund.

Analysts believe the move will benefit both investors and lenders by providing easier access to funds, encouraging broader participation in capital markets, and supporting the growth of India’s financial ecosystem. By raising the limit from Rs 20 lakh to Rs 1 crore, investors — especially high-net-worth individuals — can unlock larger value from their equity and securities portfolios. This provides a cheaper, quicker source of funds compared with selling shares.

With banks able to lend more against shares, REITs, InvITs and listed debt, participation in equity and debt markets is expected to rise. “This could improve trading volumes and broaden the investor base. Banks get a wider collateral base and higher ticket-size loans, helping them diversify lending beyond traditional credit lines,” said an analyst.
The move makes investments in instruments like REITs and InvITs more attractive by improving liquidity options for investors. “While positive, it also raises concerns about over-leverage in volatile markets, making prudent risk management critical,” he said.

Withdrawal of 2016 curbs on large borrowers

The RBI has proposed scrapping the framework introduced in 2016 that discouraged banks from lending to very large borrowers — those with aggregate credit exposure of Rs 10,000 crore or more from the banking system. The earlier framework was designed to reduce excessive reliance on bank finance by India’s largest corporate groups, encouraging them to diversify funding through capital markets.

However, the RBI noted that the Large Exposure Framework, subsequently introduced, already addresses concentration risk by capping how much a single bank can lend to a particular borrower or group. Going forward, systemic-level concentration risks will be managed through targeted macroprudential tools as and when required, instead of broad lending disincentives.

Analysts believe the change will provide corporates with easier access to bank credit, while giving banks greater flexibility in supporting large projects, mergers and expansions, without compromising financial stability.

NBFC funding for infra

The central bank has proposed a reduction in risk weights on loans extended by non-banking financial companies (NBFCs) to operational, high-quality infrastructure projects. Risk weights determine the amount of capital financial institutions must set aside against their lending. A lower risk weight effectively reduces the capital requirement for NBFCs, allowing them to lend at more competitive rates.

This change is expected to significantly ease the cost of financing for infrastructure developers, a sector widely recognised as the backbone of India’s long-term growth story.

With large-scale investments required in roads, power, urban transport and renewable energy, the move could provide a timely boost to funding availability. The RBI’s step will not only improve liquidity in the sector but also encourage NBFCs to expand their exposure to stable, cash-generating projects, thereby supporting India’s infrastructure build-out while maintaining financial system stability. “However, this relaxation may also enable higher leverage within infrastructure portfolios of NBFCs, which are often relatively concentrated. In this context, prudent capitalisation will be essential for NBFCs to maintain their credit profiles,” said Anil Gupta, Senior Vice President and Co-Group Head, ICRA Ltd.

How will ECB relaxation help?

The RBI also unveiled plans to streamline and simplify regulations for External Commercial Borrowings (ECBs). The updated framework will expand the pool of eligible borrowers and recognised lenders, rationalise borrowing limits and maturity norms, eliminate restrictions on borrowing costs, relax end-use constraints, and simplify reporting requirements.

Analysts say the changes are likely to make overseas borrowing more attractive for Indian companies by reducing costs and easing compliance, while ensuring that prudent safeguards remain in place to manage risk.
IFSC accounts given more flexibility

The central bank has extended the repatriation period for foreign currency accounts maintained in India’s International Financial Services Centres (IFSCs) – primarily the GIFT City in Ahmedabad — from one month to three months. This move is primarily aimed at exporters, giving them greater flexibility in managing foreign currency inflows and improving liquidity within IFSC banking units. By allowing a longer window to repatriate funds, the RBI hopes to encourage more exporters to open accounts with IFSC banks, strengthening India’s offshore financial infrastructure.

This step builds on the RBI’s January 2025 decision permitting exporters to maintain foreign currency accounts abroad to receive export proceeds. The extended repatriation period for IFSC accounts now brings parity between onshore and offshore arrangements, making it easier for exporters to manage currency flows efficiently. This reform will not only enhance forex liquidity in IFSCs but also support India’s broader objective of developing a more robust and globally competitive financial ecosystem.