The military strike, in retaliation for the deadly April 22 attack in Pahalgam that killed 26 people, sent shockwaves through Pakistani markets. The KSE-100 index plunged 6,272 points, or 5.5%, to 107,296 in early trade, marking a sharp downturn after India’s surprise Operation Sindoor.
In contrast, Dalal Street remained unfazed by the military escalation. After an initial dip, India’s equity markets recovered swiftly. The BSE Sensex rose 166 points, or 0.21%, to 80,802, while the Nifty 50 gained 59 points, or 0.24%, to 24,438.
India’s Operation Sindoor, a rare joint strike by the Army, Navy, and Air Force, targeted nine terror hubs in Pakistan and PoK. The Ministry of Defence stated that the operation was conducted in a focused, measured, and non-escalatory manner. Key locations struck included Bahawalpur, Muridke, and Sialkot. Officials confirmed that no Pakistani military facilities were hit, ensuring that the operation remained targeted at terror infrastructure.
The diverging reactions of the two markets reflect how the two economies—and their capital markets—are being viewed by global investors: India as a relative safe haven with solid growth prospects and capital inflows; Pakistan as a high-risk frontier market grappling with inflation, IMF dependencies, and political instability.
Economic Fallout: India vs Pakistan
India’s macro picture remains favourable. Moody’s Ratings this week reaffirmed India’s economic strength, citing robust domestic demand and stable fiscal conditions.Meanwhile, Moody’s warned that sustained escalation between the two nations could hinder Pakistan’s growth prospects, impeding fiscal consolidation and foreign-exchange reserves amid the ongoing IMF program.Pakistan’s growth has been gradually recovering, with declining inflation and rising foreign-exchange reserves under its IMF program. But a prolonged crisis could hit external financing and further strain reserves that remain inadequate to cover upcoming debt repayments.
India, by contrast, remains relatively insulated. “Comparatively, the macroeconomic conditions in India would be stable, bolstered by moderating but still high levels of growth amid strong public investment and healthy private consumption,” Moody’s said.
The non-escalatory nature of the strike and its targeted focus helped maintain investor confidence, said Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Investments, adding that “the market had already discounted the Indian strike.”
Dalal Street’s resilience could also be attributed to a strong inflow of Foreign Institutional Investors (FII), with Rs 43,940 crore in FII inflows over the past 14 days providing crucial support, said Vijayakumar.
With trade ties between the two countries minimal—Pakistan accounts for less than 0.5% of India’s total exports—the economic spillover is expected to be limited. However, Moody’s flagged that increased defense spending could weigh on India’s fiscal position.
Also read | Nifty muscle memory check: India-Pakistan conflicts have meant 5% dip. Will this time be different?
The bigger picture: Markets vs Conflict
India and Pakistan have a long history of military flare-ups, including the 1999 Kargil conflict and the 2001 Parliament attack. Yet brokerage Anand Rathi’s analysis shows that Indian markets have historically shrugged off such tensions, with limited corrections often driven more by global factors than by local conflict.
Data from Bajaj Broking showed that during five major cross-border episodes since 1999—including Kargil, Uri, and Balakot—the Nifty 50 saw an average drawdown of just 5.27%, followed by six-month returns of 7% to 19%.
Meanwhile, Pakistan’s markets have shown more volatility in such episodes, often reflecting broader fragility rather than conflict-specific damage. In a thinly traded market, foreign investors tend to retreat quickly on signs of risk.
“Even in the event of a substantial escalation, we believe the Nifty 50 is unlikely to correct more than 5–10%,” said Anand Rathi, noting that historical precedents suggest limited downside.
Risk and Resilience
India’s market resilience also stems from its internal investor base. Retail participation remains elevated, domestic mutual funds are sitting on record cash levels, and options markets suggest limited near-term volatility. Meanwhile, India’s economy is forecast to grow at 6.5% this year, among the fastest in the world.
Pakistan, by contrast, faces slowing growth, currency risks, and potential ratings downgrades if it fails to secure extended IMF support. Its equity market is valued attractively but suffers from chronic foreign capital flight and low institutional participation.
Outlook: Cautious calm
For now, Indian markets appear to have priced in the strike. “Operation Sindoor,” as the military called it, targeted nine terror hubs with precision air and missile strikes. While Pakistan has called the move “an act of war,” analysts believe the operation’s limited scope may prevent full-scale escalation.
Also read | Tale of 2 countries: Pakistan stock market down 4% post Pahalgam attack, India’s Sensex gains 1.5%
“We have to wait and watch how the enemy reacts to these precision strikes by India. The market is unlikely to be impacted by the retaliatory strike by India since that was known and discounted by the market,” Vijayakumar added.
“Markets now hinge on three key triggers — the next military move, global tariff negotiations, and the U.S. Fed’s May 7th policy decision. Volatility is here, and Nifty’s key support rests at 24,171,” said Prashanth Tapse, Senior VP at Mehta Equities.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
