Authored by: CA Punit Khandelwal, CA Sunit Khandelwal and Prof. Divya Aggarwal, MDI Gurgaon (ex-professor EMLV, France and IIM, Ranchi, India)
Assisted by: Jayant Surana and Mansi Shukla
Foreword
We are pleased to issue the 7th edition of the India Equity Risk Premium study (2025), which analyses the risk premium to be considered when determining the cost of equity using the capital asset pricing model.
The study focuses on quantitative analysis to derive the current equity risk premium under different approaches including a) historical premium, b) survey approach, c) country bond default spread approach, d) country bond default spread approach adjusted for relative country risk, e) domestic market volatility relative to a developed market and f) implied equity risk premium.
We observe that the prices have remained flat or corrected despite earnings expansion, reflecting higher return expectations demanded by investors. Coupled with declining interest rates, the forward outlook suggests a moderate expansion in the implied ERP. Contrary to this, the historical ERP has eased due to muted past equity returns.
Accordingly, based on the current market conditions, and after giving consideration to both past performance and future expectations, we recommend India ERP of 7.00% (6.5% and 7.5% being the lower and upper limit of the range, respectively) beginning in April 2025.
Given the growth slowdown, geopolitical tensions, and tariff-related risks, it’s plausible that investors demand a premium on the higher side of the range despite lower bond yields.
We hope you find the results of our study of interest and value.
