📰India-Pakistan, LG Plans a Factory, Investors Bullish on Indian Bonds

Good afternoon, 

Welcome to the best way to stay up-to-date on India’s financial markets. Today, we’re discussing

• India and Pakistan have now escalated into all-out war,

• LG India announces a third manufacturing facility,

• and Global investors stay bullish on Indian bonds.

Then, we close with Gupshup, a round-up of the most important headlines.

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—Shreyas, [email protected]

Market Update.

Drone Warfare Commences Over Cities.

India and Pakistan have now escalated nearly into all-out war, with each side reporting drone and missile defense systems active over major population areas. In Pakistan, a military spokesman claimed that Indian unmanned aerial vehicles were intercepted over Lahore, Rawalpindi, and near Karachi, while New Delhi’s Ministry of Defence asserted it had neutralized Islamabad’s aerial strikes aimed at multiple “military targets” in northern and western India. These engagements followed India’s unprecedented cross-border air strikes on nine Pakistani sites this week — the deepest incursion since the 1971 war.

For Pakistan, which denies any role in the Kashmir massacre, the shooting down of Indian drones and Pakistan’s claim to have downed five Indian fighter jets, including French-made Rafales, further inflamed tensions. In response, New Delhi scrambled emergency flights, ordered mock drills across several states, and briefed diplomatic channels at the United Nations and the IMF, where India’s executive director reportedly urged a reassessment of Pakistan’s loan eligibility. That loan eligibility could cause a severe economic crisis and total default on sovereign debt.

Market volatility: Pakistan’s KSE-30 Index plunged more than 7 percent, forcing a one-hour trading halt, while India’s rupee suffered its steepest intraday decline in over three years and the Nifty 50 slid nearly a percent. Yet history suggests these shocks may prove fleeting: past India-Pakistan crises in 2019 and 2016 saw equities rebound within days once diplomatic channels resumed, and foreign investors largely priced in the enduring restraint nuclear deterrence tends to impose.

Still, this latest flare-up carries fresh perils. Unlike earlier skirmishes, the exchange of drones and the targeting of air-defense radars on both sides indicate further entanglement. Civilian casualties have already been reported in cross-border shelling, underscoring the risk that localized engagements could spiral into broader exchanges. Political leaders in both capitals have publicly authorized reciprocal actions, which hints at an erosion of previously tacit red lines.

The globe weighs in: Trump described the warfare as “so terrible,” offering US mediation. Rubio pressed Pakistan’s prime minister to exercise self-control, while diplomatic outreach from China, Russia, and the EU has emphasized the dangers of escalation between two nuclear-armed neighbors whose animosity has long imperiled South Asia’s stability.

LG Plans a New Indian Factory.

LG India’s announcement of a third manufacturing facility in Andhra Pradesh underscores the South Korean conglomerate’s deepening commitment to India as both a strategic production hub and a rapidly expanding consumer market. With an investment of approximately $600 million (₹51.6 billion) over the next four years, the new plant will initially focus on air-conditioners since India is likely to 2.5x their use from 93 to 240 million units by 2030. LG will also add washing machines, refrigerators, and compressors through 2029. 

By locating this capacity in southern India, LG leverages state-led incentives and Andhra Pradesh’s improving logistics infrastructure. It also positions itself to serve domestic demand driven by rising incomes and more frequent heat waves, which have caused demand in the south to rise more than in the north. Also, the new plant’s proximity to raw-material suppliers, port facilities on the east coast, and government industrial parks will accelerate LG’s delivery lead times for both domestic retail channels and exports to markets in the Middle East and Southeast Asia.

This expansion comes at a crucial juncture as LG Electronics India has deferred its $1.5 billion (₹129 billion) IPO in the face of volatile market conditions.  The decision to pause the IPO, even as LG commits hundreds of millions to local manufacturing, reflects a willingness to prioritize long-term operational scale over near-term fundraising.  A recent earnings call with the parent company showed the CFO highlighting strategic patience. He also suggested that a more favorable valuation environment will be sought before returning to the equity markets.

China +1: Global electronics manufacturers are diversifying production away from China’s high labor costs and trade uncertainty. PLI schemes have attracted approximately $4 billion (₹344 billion) in investments since their inception, offering fiscal subsidies of up to 20 percent on incremental sales of key components and complex goods.  LG’s third plant thus complements its existing facilities in Pune and Greater Noida, reinforcing the company’s ability to amortize fixed-cost investments across a larger volume base and to negotiate better terms with suppliers of steel, plastics, and electrical components.

India: The Make in India ambition continues to be fueled to raise manufacturing from 17 percent of DGP to 25 percent by the end of this year. Also, India can narrow the trade deficit in consumer durables while reducing dependence on imported Chinese white goods.

Global Investors Still Bullish on Bonds.

Overseas investors have maintained a sanguine view of Indian markets even as cross-border hostilities with Pakistan flare, buoyed by the RBI’s commitment to aggressive liquidity support and ongoing rate cuts. In recent weeks, the central bank has extended its cash-injection operations, keeping systemic liquidity in mild surplus and underpinning one of the strongest fixed-income rallies in Asia this year. The floating rupee-linked repo facility and 50 basis points of cuts have created credit growth. The five-year sovereign yield slipped below 6 percent for the first time since 2022, while global index-eligible bond inflows have sustained momentum despite the regional tensions.

Bonds and macro: Foreign portfolio managers cite the rupee’s elevated carry as another draw. At a forward premium of roughly 5 percent, the currency offers a yield pick-up against many emerging-market peers. Essentially, foreign investors are incentivized to use dollars in India since yields are higher. Several investment funds see a 60 basis point drop incoming for the 10-year yield to reach pandemic lows again. For bulls, volatility upticks like war with Pakistan are buying opportunities. That being said, escalation not being short-term would be a large detractor from value. 

Equities have shown similar resilience. They have risen 10 percent since “Liberation Day” in hopes of a favorable trade deal with the United States. There is also limited volatility due to skirmishes since the sizable domestic consumption story and robust macro fundamentals will ultimately trump temporary geopolitical anxieties.

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Gupshup.

Macro

• Rupee falls 1.1 percent to 86 for the biggest decline since the US started hiking rates in 2022. The large intraday loss was due to reports of missile and drone fire over the border. More missile attacks in Indian-controlled Kashmir also caused a selloff in the rupee. It is yet to be seen whether this is going to be a structural shift out of Indian assets or a short-term change.  

• 5-year yields rallied below 6 percent, causing prices of short-term bonds to rise. Ample liquidity and expectations of further rate cuts have amplified this gain. Recent pauses at the Fed and continued cuts by the BoE and ECB have made a global rate-cutting regime more likely. Corporate, 3-year notes also saw yields fall to just around 6.9 percent for a low since 2022. 

• India's UK trade agreement reveals how Trump and Modi can make an FTA. India is fully willing to cooperate on cars, alcohol, and complex medical devices. India also gave up concessions on letting UK companies gain government contracts in India. New Delhi managed to grow its jewelry business, plus apparel and gain tax exemptions for Indian nationals.  

• A large RBI payout will offset weaker government revenues. The dividend is likely to be around $41.5 billion (₹3.5 trillion) from surplus income on its holdings and valuation changes from forex reserves. Weak growth and lower disinvestment receipts have caused government revenues to fall this year so far.

Equities

• Reliance drops move to trademark 'Operation Sindoor', blaming a junior employee. Reliance was caught trying to trademark the military’s missile strike operation in Pakistan. Reliance said they fully stood behind the Indian government and that the trademark file was inadvertent and not sanctioned.  

• Tesla's Indian head just resigned as Musk plans to launch in Delhi and Mumbai. Menon declined to comment, citing personal reasons for leaving. He was responsible for setting up India’s first-ever Tesla operations. The China team is going to be handling the launch of Tesla in India’s market now.  

Alts

• Indian insurers are seeing easier rules for bond forwards to hedge. Bond forwards allow insurance companies to hedge out long-term liabilities with less capital outlay, which is beneficial to allow those companies to invest premiums in other assets. Insurance is asking for revisions to accounting practices and counterparty risk agreements to make holding forwards more prevalent.  

Policy

• Pakistan was very positive about Chinese fighter jets for repelling Indian attacks. The government propped up Chinese fighters, which they reportedly used to shoot down 5 Indian Rafales. Foreign Minister Dar also said that he has kept Beijing in the loop on all actions that it has taken in Kashmir and the conflict until now. China actually refused to comment and has tried to de-escalate the conflict.  

• India is shutting down 25 airports near Pakistan with growing tensions. The northern and western parts of India have restricted civilian airspace due to mounting drone and missile attacks from both countries. This is a far more cautious stance than in years past, like 1971 or 2019, which could reflect further escalation.  

See you Friday.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.