You can think of lower ERP as investors assigning higher valuations, that is, Price to Earnings (PE) multiples to stocks rather than their earnings going up. Therein lies the risk. Stock prices are being driven by investor confidence rather than earnings,” said Vikas Gupta, founder, Omniscience Capital, a SEBI Registered Investment Advisory firm.
“With an ERP of 4.7% and a risk free rate of 5.9% (based on the current 10 yr G-Sec yield), the long term return on Indian equities is 10.6%. If you consider the effect of long term capital gains tax, it falls further to around 9.5%,” said Ravi Saraogi, founder, Samasthiti Advisors, a SEBI Registered Investment Advisor.