📰Missile

Hello. India successfully tested a hypersonic missile on Sunday, making it the fourth country, after China, Russia, and the US, to do so. We’ll dive deeper into India’s defense industry, and then close with Gupshup, a round-up of the most important headlines.

Markets

Read here for an appendix on the above.

Analysis

India’s Defense Industry To Grow At Unprecedented Rate

India successfully tested a hypersonic missile on Sunday, making it the fourth country, after China, Russia, and the US, to do so. The test signifies the increased growth of military spending, which is expected to rise at a 14 percent CAGR for the next decade, double its growth rate historically.

India’s defense budget for FY25 has been outlined to be $75 billion (₹6.2 trillion) which is a 4.78 percent increase compared to FY24; the largest budget ever allocated to a single ministry. Some other stats:

• The Ministry of Defense (MoD) aims to export $2.41 billion (₹210 billion) worth of military goods in the coming year, a goal slightly below last year’s $2.63 billion in exports, which marked a 33 percent increase from 2023.

• Additionally, $2.9 billion (₹243.6 billion) has been allocated to the Defense Research and Development Organization (DRDO). The DRDO, which operates 52 labs and employs thousands of scientists, spearheads research across various defense-related fields.

• The MoD has also earmarked $12 billion (₹975 billion) for Deep Tech initiatives. This program provides loans to private-sector companies to accelerate military innovation, with India currently boasting 194 startups dedicated to defense technology development.

Defense growth has been given importance due to ongoing disputes with Pakistan and China regarding territory. Additionally, the government is looking to push the “Make in India” campaign. The campaign has five lists of 509 products that the MoD is looking to manufacture entirely within India rather than rely on imports. Now, the government has released a portal that readily updates the list of imports that have been or are going to be embargoed.

The desire for indigenization has led to India opening up manufacturing to more private contractors as well. Starting in 2001, India has allowed 333 companies to take on contracts with a total of 539 industrial licenses. 110 of those companies directly provide arms to the Indian government. Some of the largest players are Hindustan Aeronautics Limited and Bharat Electronics Limited which provide aerospace technology and computer systems respectively. 

The inventory of advanced naval and air force equipment has been declining due to obsolescence. This reduction, coupled with the growing need for combat readiness driven by geopolitical tensions, is expected to act as a growth catalyst for the defense sector. A shift toward domestic development is also anticipated, as India's current arms suppliers face increased global scrutiny. Russia, which accounts for 36 percent of India's arms imports, has come under heightened observation from Western nations due to the Ukraine war. While India may increasingly source from other suppliers—such as the US and France, which together provide 42 percent of its air force armaments—Russia is likely to remain the largest single supplier for the foreseeable future, until India achieves greater self-reliance in defense production.

Macro

• Finance Minister Sitharaman argues for lower bank rates due to a lack of affordability. This call for lower borrowing costs comes amid concerns about a potential economic slowdown, though Sitharaman downplayed any risks to growth. Her comments follow similar remarks by Trade Minister Piyush Goyal, who recently advocated for an interest rate cut to provide further impetus to economic growth. (Reuters) 

• Bonds see the largest sell-off since JPM index inclusion. Overseas investors are reducing their holdings of Indian bonds at the fastest pace since at least June 2024, driven by rising US yields that have diminished the appeal of Indian fixed-income securities. Global funds sold a net $588 million (₹49.6 billion) of Fully Accessible Route (FAR) debt last week, marking the largest weekly outflow since these bonds were included in JPM's emerging-market bond index in June. The spread between India 10y has reduced to about 240 bps now. (MoneyControl) 

• Rupee stabilizes as RBI interventions regain control after two weeks of depreciation. On Monday, the Indian rupee held steady at 84.3875 per U.S. dollar, supported by likely Reserve Bank of India action, despite headwinds from weak domestic equities and continued foreign portfolio outflows. (Reuters)

• Gold prices are on track for their largest weekly decline in over three years, falling more than 4 percent so far, as expectations of slower interest rate cuts by the U.S. Federal Reserve boosted the dollar, reducing gold's appeal. Spot gold dropped to $2,565.49 per ounce, while silver, platinum, and palladium also saw weekly losses. The dollar is poised for its biggest weekly gain in over a month, driven by strong U.S. retail sales in October, which exceeded expectations. (Reuters)

Equities

• Delivery Hero is looking for a $1.5 billion (₹126.4 billion) equity raise by doing an IPO of its Middle Eastern arm, Talabat. The food delivery app has an implied valuation of $10 billion (₹844.1 billion). Delivery Hero has been cementing its growth in the region through equity raises and acquisitions such as Zomato in 2019. (BBG) 

• Hindalco expects to gain from China scrapping export tax rebates. The company expects this move to reduce cheap imports from China into India. Aluminum manufacturers have been struggling with increased imports of foil from China, which have captured about 30 percent of the local market. In response to this issue, India's trade ministry has proposed implementing anti-dumping duties ranging from $619 to $873 per metric ton on aluminum foil up to 80 microns thick, excluding foil below 5.5 microns for non-capacitor applications. (Economic Times)

Alts

• Ambani-backed Addverb is introducing humanoid robots by 2025. Ambani is entering the humanoid robot market through his backed startup Addverb Technologies Ltd. The company plans to introduce its first human-like robots in 2025, aiming to compete with established US and Chinese manufacturers in industries such as fashion, retail, and energy. Delhi will see around 100 initial units produced. (BBG) 

• Gas retailers see a hit to margin due to cheaper prices after government allocations. The Indian government has cut natural gas allocations to city gas distributors for the second consecutive month. The overall share of domestic gas allocation to city gas distribution companies has been reduced to 30-37 percent from 50 percent last month and 70 percent at the beginning of the year. Analysts expect the gas retailers will need to raise prices by 10 percent to maintain their profit margins. (BBG)

Policy

• The Indian government is resisting two key RBI proposals, citing concerns over their potential impact on credit growth. The proposals include requiring banks to allocate more funds for infrastructure projects under construction and hold additional liquid assets against online deposits, which banks argue could raise funding costs. RBI has been cracking down on what it views as predatory loan practices (Reuters)

• The Indian government is expected to extend Shaktikanta Das's term as Reserve Bank of India governor for a second time, potentially making him the longest-serving chief since the 1960s, according to Reuters. Das, a trusted bureaucrat in Prime Minister Modi's administration, has led the RBI since December 2018, navigating a period of strained government-regulator relations. (Reuters)

See you Wednesday.

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.

1 USD = 84.40 Indian Rupee