You're trying to value a company in Mumbai or maybe a tech startup in Bengaluru. You’ve got your cash flow projections. You’ve got your growth rates. But then you hit the wall: the discount rate. Specifically, the equity risk premium India Damodaran publishes every year. If you get this number wrong, your entire valuation is basically fiction.
Valuation isn't just math; it’s a mood ring for the market.
Aswath Damodaran, the "Dean of Valuation" at NYU Stern, just dropped his January 2026 data update. It's the annual ritual every analyst waits for. This year, the numbers tell a story of a world that is feeling a bit more jittery, even if the headline stock indices look okay. Honestly, if you're still using the same 8% or 9% you used three years ago, you're probably mispricing your investments.
The 2026 Shift: What the Data Actually Says
Let’s get into the weeds. As of early January 2026, Damodaran’s data shows a significant shift in how we view "mature" markets versus emerging ones like India.
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The baseline has moved. For the longest time, we treated the US as the gold standard of risk-free. But after the Moody’s downgrade of the US to Aa1 in late 2025, Damodaran had to tweak the machinery. He now calculates a "mature market premium" by netting out a default spread even for the US.
Breaking down the Indian ERP
For India, the numbers aren't just one single digit. They are a stack.
- Mature Market Premium: 4.23% (The base for a "safe" equity market).
- India's Moody's Rating: Baa3.
- Adjusted Default Spread: 1.87%.
- Relative Equity Volatility Multiplier: 1.52x.
When you do the math—adding the base premium to the country risk premium (which is that default spread multiplied by the equity-to-bond volatility)—you arrive at a Total Equity Risk Premium for India of approximately 7.07% to 7.25% depending on whether you use the pure rating-based approach or the CDS-informed one.
It sounds lower than the historical 10% or 12% people used in the early 2000s. That’s because India has matured. But it’s higher than the US, and that gap is what we call the Country Risk Premium (CRP).
Why You Can't Just Use "Historical" Returns
Most people make a massive mistake. They look at the Sensex from 1990 to now, see an average return of 14%, subtract the 7% G-Sec rate, and say, "Hey, the ERP is 7%!"
Stop. Just stop.
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Historical risk premiums in emerging markets are notoriously "noisy." If you had a couple of spectacular bull runs followed by a decade of stagnation, your average means nothing for the future. Damodaran argues—quite forcefully—that we should be looking at implied premiums.
What are investors demanding today based on what they are paying for stocks right now?
In 2025, global equities added over $26 trillion in market cap. India, however, lagged slightly behind the US and China in terms of dollar-denominated gains. This relative underperformance actually pushes the implied risk premium up because investors are essentially saying, "I need a bigger carrot to stay in this market."
The "De-Dollarization" of Risk
Here is a nuance that usually gets lost in the comments section of LinkedIn.
If you are valuing an Indian company in Indian Rupees (INR), you shouldn't just take the US ERP and add a spread. You have to account for the inflation differential. Risk-free rates in India (the 10-year G-Sec) are sitting much higher than US Treasuries.
Damodaran’s 2026 approach simplifies this:
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- Work in a consistent currency.
- If you work in USD, use the 7.07% ERP.
- If you work in INR, the ERP stays the same (it’s a premium, after all), but your risk-free rate jumps to the Indian G-Sec rate (minus any local default risk).
Essentially, the equity risk premium India Damodaran provides is the "extra" juice you need over the risk-free rate, regardless of which currency you’re dreaming in.
How to Apply This to Your Portfolio
Let’s be real. Most of us aren't building 50-tab Excel models for every stock we buy. But you should still use these numbers as a "sanity check."
If you’re looking at a mid-cap stock in Pune and your expected return is only 10%, you’re likely losing money on a risk-adjusted basis. Why? Because if the risk-free rate is ~7% and the ERP is ~7%, your "hurdle rate" should be at least 14%.
If the stock isn't likely to clear 14%, you’re better off in a fixed deposit or a safer US-indexed fund.
Actionable Steps for 2026:
- Update your hurdle rates. Move away from the "standard" 12% total cost of equity. With the current ERP and interest rate environment, 13.5% to 15% is the new "normal" for Indian equities.
- Use the 1.52x Multiplier. Don't just add the bond default spread. Equity is more volatile than bonds. Damodaran’s 2026 data suggests that Indian equities are about 50% more volatile than the sovereign debt. Use that multiplier.
- Watch the CDS spreads. The Credit Default Swap (CDS) for India gives a more real-time view than Moody’s ratings, which move at the speed of a glacier. If the India CDS starts spiking, your ERP needs to go up immediately, even if the official "Damodaran Table" hasn't been updated yet.
- Differentiate by Revenue. If you're valuing Infosys, don't use the full India ERP. Most of their cash comes from the US and Europe. Use a weighted average based on where the money is actually made.
Valuation is a bridge between stories and numbers. The story of India in 2026 is one of resilience, but it’s not a "risk-free" story. By using a disciplined ERP, you’re not being a pessimist—you’re being a professional.
The days of cheap money and ignored risk are gone. These numbers are your map. Use them.