Do Financial Markets Price Physical Climate Risk? Evidence from Listed Indian Firms

Do equity markets in the world’s most heat-exposed large economy price physical climate risk? We provide the first plant-location-matched estimate for Indian listed manufacturing, regressing daily stock returns of 453 firms against district daily mean temperature over 2015–2019. A one-degree Celsius rise in daily mean district temperature reduces daily returns by 0.83 basis points, implying an annualised return drag of roughly 2.1 percentage points per degree of warming. The effect is sharply concentrated in the pre-monsoon hot season: the coefficient rises to -2.28 basis points per degree Celsius in March–June, compared with -0.39 basis points in the remaining months, which is statistically indistinguishable from zero. This seasonal asymmetry rules out investor sentiment and points to a real activity channel operating through labour productivity and production disruption. Industry heterogeneity corroborates the mechanism: Electronics and Plastic Packaging show the largest negative responses, while Textiles show a positive coefficient consistent with cotton supply effects. Our estimates identify the value-normalised damage function g(Z)/V, the key structural input required to test whether Indian equity markets compensate investors for bearing physical climate risk.