India’s defence sector had a blockbuster week on the markets, with the Nifty India Defence Index surging 17.2%—its biggest weekly gain since the index was created in 2022. The index ended at a fresh high of 8,309.2 on May 17, up 5.6% just on Friday.
The sharp rally came on the back of media reports hinting at a possible ₹50,000 crore boost to defence spending under a supplementary budget later this year. If that materialises, total defence allocations for FY26 could cross ₹7 trillion.
In the Union Budget announced in February, defence spending for 2025-26 had already been raised 7.7% to ₹4.91 trillion from the FY25 revised estimate of ₹4.57 trillion.
Out of the total allocation, ₹1.8 trillion has been earmarked for capital expenditure—used to procure new weapons, systems, and hardware. That’s a 12.9% jump from the ₹1.6 trillion capex set in the previous year’s revised estimate. But here’s the catch: actual capital spending in FY25 rose just 3.4% over FY24, and it missed the budget target by 7.3%.
Meanwhile, revenue expenditure—which includes salaries and day-to-day operations—is expected to grow more moderately, rising 4.9% to ₹3.12 trillion in FY26. In FY25, revenue spending overshot both the previous year and the budget estimate, growing 2.3% and 5.1%, respectively.
Several defence stocks took off during the week. Paras Defence and Space Technologies, Cochin Shipyard, Mazagon Dock Shipbuilders, and Garden Reach Shipbuilders & Engineers saw their share prices climb between 10% and 20%. The broader index is now up more than 50% from its recent lows.
Tensions along the India-Pakistan border and recent reports of India deploying indigenous defence systems in active combat have reignited investor interest. The government’s continued push for defence self-reliance, an expanding export footprint, and steady increase in defence budgets have also helped the mood.
Some experts suggest that India’s use of domestically developed systems in recent engagements has not only showcased their quality but also demonstrated India’s ability to integrate its own systems with foreign platforms. This kind of interoperability is seen as a sign of growing technical sophistication.
Still, not everyone is entirely comfortable with the rally. The Nifty Defence Index has nearly tripled over the past year, compared to a 11.2% gain in the Nifty 50. And that’s triggered valuation worries.
The 17 stocks in the defence index are now trading at a trailing price-to-earnings (P/E) multiple of 51x. That’s more than double the 23x multiple of the Nifty 50.
High P/E ratios typically suggest that investors are already pricing in a lot of future growth. Which means, unless companies consistently beat earnings expectations, the risk of a correction rises. A shift in market sentiment—or any slip-up in delivery—could be enough to trigger a pullback.