Why Indian markets are undeterred by strikes against Pakistan

CNBC

07-05-2025

Pakistani soldiers take security measures around the city as the people panic during blackout after India launches strikes on Pakistan, in Muzaffarabad, Pakistan on May 7, 2025.
Investors are sticking with the India story, with optimism on its growth prospects dwarfing geopolitical fears.
Indian markets shrugged off the latest tensions with Islamabad after New Delhi struck several targets within territory controlled by Pakistan in a military operation early Wednesday.
"Structural reforms, resilient domestic demand, and strong macro fundamentals continue to offer a compelling case," said Mohit Mirpuri, an equity fund manager at SGMC Capital.
"Investors may take a momentary pause, but this doesn't derail India's trajectory as a key allocation in emerging markets," added Mirpuri.
Markets also appeared to be drawing support from the progress on India's trade talks with major trading partners, including a free trade agreement with the U.K. sealed Tuesday.
The country is expected to be among the first in the region to strike a bilateral trade deal with the U.S., potentially before the third quarter of 2025, said Radhika Rao, a Singapore-based senior economist at DBS Bank.
"We believe Indian assets will remain fairly contained despite the increase in geopolitical tensions with Pakistan," said Johanna Chua, global head of emerging market economics at Citi, in a note to clients shortly after India carried out the strikes.
Chua said there were historical precedents for her team's views and pointed to investors' reaction in 2019, in the aftermath of the Pulwama attack where 40 Indian security personnel were killed in an ambush.
Currency markets were "fairly contained" and 10-year Indian government bond yields traded within a range of 15 basis points despite an election year and interest rate cutting environment.
While anticipating some knee-jerk market reaction, investors are hopeful for a swift de-escalation that could limit the fallout.
Indian shares traded nearly flat in the wake of the military operation, having declined in the previous session.
The benchmark Nifty 50 and the BSE Sensex were little changed, signaling investors so far were not perturbed by tensions between the two nuclear-armed countries. Though experts did not rule out a sharper market impact if the conflict escalated.
Indian equities could still see some volatility over the near term with downside risks, followed by a gradual recovery, said Kranthi Bathini, director of equity strategy at WealthMills Securities.
"The key question is whether this turns into a full-fledged conflict or remains a limited defense strike," Bathini said. "A wider escalation could dent investor sentiment, while a contained response may barely leave a mark on the markets, he said.
The rupee weakened 0.33% to 84.562 against the greenback amid a broader depreciation across Asian currencies, though it was still hovering near three-month highs.
Yield on Indian 10-year benchmark government bonds was marginally lower at 6.339%. Get a weekly roundup of news from India in your inbox every Thursday.
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"While the latest exchange of fire has been much more aggressive than the previous episode in 2019, we still think it will end in de-escalation over the coming months." Darren Tay, head of APAC Country Risk at BMP said, adding that investors should remain generally bullish on India.
However, others cautioned that the current environment is significantly more intense than the 2019 attacks.
"The situation on the border remains quite fluid. The scope and scale of India's military action this time around is far greater than in 2016 or 2019. That, in turn, suggests Pakistan will feel more compelled than before to mount a "proportionate" response," Tom Miller and Udith Sikand, senior analysts at Gavekal told CNBC.
"Having said that, the muted reaction of Indian asset prices to events overnight suggest investors don't expect an endless cycle of military retaliation," they added.
India's operation follows a militant attack last month in Pahalgam, Jammu and Kashmir, in which 26 people were killed.