Why stock market investors shouldn't panic amid rising Indo-Pak tensions
Missile strikes and border escalations tend to send a chill down investors' spines. But in the case of the latest Indo-Pak flare-up, India's markets appear to be taking it in stride, and with good reason.
While 'Operation Sindoor' led to worries about increased market volatility and losses, the main indices on Dalal Street actually managed to end in green in the previous session. Even today, the stock markets remained steady.
The quick rebound of the markets after initial jitters, strong domestic inflows, and muted foreign outflows all point to a market that has matured well beyond knee-jerk panic.
Ram Medury, Founder and CEO at Maxiom Wealth, was among analysts who said that 'Operation Sindoor' was focused and non-escalatory. 'The strikes were precise, targeting only terrorist infrastructure, and avoided Pakistani military facilities, signaling restraint and an intent to avoid a broader conflict,' Medury said.
He noted that the Defence Ministry's framing of the operation as 'measured and non-escalatory' helped contain market nerves. BE CAUTIOUS, DON'T PANIC
Looking ahead, he cautioned that investor sentiment hinges on Pakistan's response. 'Market sentiment remains stable for now, but if Pakistan's response escalates significantly, especially beyond symbolic retaliation, foreign institutional investors (FII) could turn cautious, particularly given the rupee's recent appreciation and global risk aversion. However, if Pakistan's reaction is limited to face-saving measures, markets are unlikely to see a significant correction,' he said.
Medury also flagged India's non-military moves as a potent signal to investors.
'India has intensified non-military pressure, including a total trade ban, suspension of the Indus Waters Treaty, closure of airspace and ports to Pakistani traffic, and blocking digital channels, aiming to further weaken Pakistan's already fragile economy,' Medury said.
'India's economic exposure to Pakistan is negligible, and India's robust reserves and economic fundamentals provide stability, while Pakistan faces heightened risk of fiscal and external financing stress if tensions persist,' he added.
He concluded that India would likely continue leveraging its economic strength: 'India is expected to continue using economic and diplomatic levers to isolate Pakistan, regardless of the military situation.' WHY INVESTORS DON'T NEED TO WORRY
The bigger takeaway for investors, particularly Indian retail participants, is that this geopolitical storm hasn't spooked the markets, and for good reason. India's economy, which recently crossed the $4 trillion mark, has minimal direct trade with Pakistan.
Citi analysts point out that past conflicts haven't shaken financial markets for long. After the 2019 Pulwama-Balakot episode, bond yields spiked just 15 basis points before settling. During the Galwan Valley clash with China in 2020, the rupee slipped 1% but quickly bounced back.
Ajay Marwaha, head of fixed income at Nuvama Group, told Reuters, 'If there is a cessation of hostilities like there should be, pragmatically and practically, the investment climate may not actually be harmed.'
Portfolio manager Sat Dhura of Janus Henderson Investors noted that local investors are emerging as a stabilising force. 'Strong domestic inflows could provide support to the market,' he said, even if foreign investors become skittish in the short term.
'The Indian market had begun to outperform on the back of the perception that there is some insulation from Trump tariffs given the strength of domestic consumption and a clear signal of monetary loosening from the central bank,' Dhura added.
Radhika Rao, senior economist at DBS Bank, also agrees. 'While sentiments are likely to be jittery in the immediate term, these tensions are unlikely to derail the medium-term appeal of the Indian economy,' she said.
She highlighted the recently concluded UK trade deal and ongoing US negotiations as key positives. 'The just-concluded UK deal, progress on a US trade agreement, and accommodative monetary policy would be more important factors in shaping investor outlook.'
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said investors should track Pakistan's response.
'Uncertainty regarding the extent of an expected face-saving response from Pakistan to India's Operation Sindoor will weigh on markets. From the market perspective, it is important that the conflict should not escalate,' Vijayakumar said. 'An escalation, apart from other fall-outs, will also impact India's fiscal consolidation drive. If the MPC is to continue with rate cuts, fiscal consolidation is important.'
'In the current context of uncertainty, investors may wait and watch the developments on the India-Pak tensions,' he added.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)
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