The Risk-Free Rate is the theoretical rate of return on an investment with zero risk, meaning there is no chance of losing money.
The Risk-Free Rate represents the return investors expect from safe investments, typically backed by governments.
In practice, it is usually approximated using government bond yields, since these are considered to have minimal default risk.
In India, benchmarks often relate to securities issued under the influence of the Reserve Bank of India.
👉 Investors expect higher returns than the risk-free rate for taking additional risk
👉 Expected Return = Risk-Free Rate + Risk Premium
"If a government bond yields 7%, it may be considered the risk-free rate in that economy."