India Stocks Face Reset: Are Markets Underpricing Risk?

• Equity Risk Premium (ERP) is crucial for valuation and asset allocation, representing excess return investors demand for equity risk.
• Aswath Damodaran's research highlights three ERP approaches: surveys, historical returns, and implied premiums, favoring the forward-looking implied method.
• India's ERP ranges from 7.1% (surveys) to 8.5% (historical averages + country risk premium) and 7.08% (implied + country risk premium).
• Despite escalating macro risks, US implied equity premiums have declined, suggesting markets may be underpricing risk.
• Analysts expect India's ERP to harden to 8-9.5%, potentially leading to a 7-10% market correction for a fair ERP.