Risk Free Rate in the Context of Indian Market

Management

In the developed countries, investors have a clear view on getting the risk free rate to evaluate their investment. The return on local government securities is the only best forecasting on riskless rate. Most investors in developed countries choose the return on the government bonds to be risk free rate. The valuation on their investment is done easily because the basic point, risk free rate, is available every time. However, the concept of risk free rate in developing countries is very complicated for investors in choosing the right one. We cannot, sometimes, find the riskless rate to be basic start in evaluating the investment. The risk free rate is derived from the expected return on a risk-free asset. On the basis of risk free rate, the expected returns on the risky investments are calculated with the risk creating an expected risk premium which is added on to the risk free rate. Moreover, the risk free rate is also the basic factor for some empirical tests of financial theories: the Capital Asset Pricing Model (CAPM), Modern Portfolio Theory, and Black-Scholes Model. The purpose of this study is to determine the risk free rate using in valuation of investment in the context of India. The specific objectives include: To determine the conditions for risk free rate, To find out the different types of government securities which are available in India, To compare the variability between the return on Indian and the US government securities, To find out whether the return on Indian government securities is to be risk free or not.

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