India–Pakistan tensions: Why markets may stay resilient despite heightened tensions 

The Indian stock markets are currently encountering a fresh challenge due to rising tensions with Pakistan following a tragic terrorist incident in Pahalgam. Despite experiencing a promising upturn earlier in the year, fueled by factors such as a reduction in global trade tensions, stabilization of the domestic currency, and heightened FII investment, the market has once again witnessed a downturn.

After a period of recovery following a correction based on valuations and uncertain policies from the Trump administration, recent geopolitical events following the Pahalgam attack have led to a substantial decline in headline indices. The Nifty has dropped below the 24,000 mark, and the Sensex has plummeted by over 850 points in intraday trade on Friday.

Pakistan’s reaction to India’s strong response, such as the suspension of the Indus Water Treaty, has heightened the possibility of a potential military confrontation. With incidents of cross-border firing being reported, investors have become cautious and are avoiding long positions due to the prevailing uncertainty, particularly ahead of the weekend.

However, despite heightened tensions between India and Pakistan following the Pahalgam attack, Anand Rathi Research noted that historical trends show that Indian equity markets, particularly the Nifty 50, tend to remain resilient during such conflicts. 

As per a study by brokerage Anand Rathi Research, India–Pakistan Conflict: Possible Impact on Indian Equities, past episodes like the Kargil War, Uri attack, and Balakot airstrike led to only minor corrections of 1–2%. Even if tensions escalate, analysts expect the Nifty to correct no more than 5–10%, with any dip likely being short-lived. Investors are advised to stay disciplined, stick to strategic allocations, and consider buying opportunities rather than panic selling.

Historical Perspective

In major past instances like the Kargil War (1999), Uri attack (2016), and Pulwama-Balakot strike (2019), the Nifty's correction was contained within a modest range of 0.8% to 2.1%.

The only significant market correction during heightened tensions was after the 2001 Parliament attack, but that drop (~13.9%) was influenced more by the global tech meltdown and a ~30% decline in the US S&P 500 than by the India–Pakistan standoff itself.

In comparison with broader global conflicts (including Russia-Ukraine, US interventions, and Israel-Gaza conflicts), the average equity market correction across countries was around 7%, with a median fall of 3.2%.

Expected impact in 2025

If tensions escalate into a limited conflict, the Nifty 50 is expected to see a correction of about 5–10% at most.

Analysts suggest that current global risk pricing, relatively strong domestic macro fundamentals, and India's historical market behavior during conflicts support a view of limited downside.

Unlike major global wars that led to prolonged declines (e.g., Russia-Ukraine war causing -33.4% fall in Russian equities), India-Pakistan conflicts tend to lead to short-term dips followed by quick recoveries.

Advice for Investors:

Investors following the 65:35:20 strategic asset allocation model (65% equity, 35% debt, 20% liquidity) are advised to stay put.

Those with an equity allocation gap could even consider buying into dips, aligning their portfolios with their long-term strategy.

Panic selling is discouraged; instead, focus should remain on long-term fundamentals and maintaining portfolio discipline.

What other experts predict

Investors are feeling apprehensive about the evolving geopolitical situation with Pakistan following the recent events in Pahalgam. There is a widespread expectation in the markets for increased tensions between India and Pakistan. The uncertainty surrounding how and when India will respond to these developments is causing unease among investors. 

According to G Chokkalingam, the founder and research head of Equinomics Research, the current situation between India and Pakistan may cause market instability and potential further declines. It is advised for investors to exercise caution and closely monitor the ongoing developments. However, there is no need to panic at this juncture as a full-scale war is unlikely. Nevertheless, tensions are expected to escalate, which may impact the markets. Despite this, historical trends suggest that the market will recover, making it a viable long-term investment opportunity. Chokkalingam also expressed optimism towards the banking sector.

U R Bhat, co-founder & director of Alphaniti Fintech, expressed concern about recent developments in Pahalgam. "Investors are wary of the evolving situation with Pakistan following the recent Pahalgam attack. The potential escalation of tensions between India and Pakistan is creating uncertainty in the market. The manner and speed of India's response to these developments remain uncertain. In light of this, investors are maintaining a cautious approach and keeping their positions somewhat conservative," Bhat told Business Standard.