South Asia was jolted on April 22, 2025, by a terror attack in Pahalgam, sparking fresh diplomatic tensions between India and Pakistan. While the incident intensified regional unease, its aftershocks in financial markets played out quite differently on either side of the border.
Indian Markets Defy Turbulence
Contrary to expectations of volatility, Indian stock markets responded with resilience. On May 5, the Nifty 50 index closed at its highest point in calendar year 2025, extending a bullish trend that began in late April.
Investor confidence remained undeterred despite the growing political friction, supported by several macroeconomic factors, including:
- Softening global crude oil prices, reducing inflationary pressures.
- A weakening U.S. dollar, encouraging capital inflows.
- Strong foreign institutional investments signal global trust in India’s economy.
- A firming rupee, reaching a five-month high, further boosts sentiment.
Defence Stocks Surge Amid Strategic Posturing
The geopolitical backdrop added momentum to India’s defence sector. Stocks like Hindustan Aeronautics Ltd (HAL) and Garden Reach Shipbuilders & Engineers (GRSE) saw strong gains post-April 23. The rally reflects market anticipation of increased defence spending as India reinforces its strategic readiness.
Sectoral and Global Wind Power Broader Rally
India’s market strength is not just a reaction to domestic dynamics. Broader global developments are also fuelling this upward trajectory. Notably:
- The U.S. Federal Reserve’s pause on interest rate hikes has reignited interest in emerging markets.
- Sectoral resilience in auto, FMCG, and banking has provided further ballast to the rally.
- Robust corporate earnings and economic stability are shielding markets from external shocks.
India appears relatively insulated from regional political strife, with market behaviour reflecting long-term investor faith in its structural growth story.
Read More: Nifty Waves Index Launched: Know the Top 10 Constituents and Their Weightage.
Pakistan’s Market Spirals Into Decline
In stark contrast, Pakistan’s financial markets have buckled under pressure. The benchmark KSE-100 index dropped 635.05 points on May 5 alone. Since April 23, it has shed more than 7,500 points — nearly a 6% plunge.
The sell-off is driven by a combination of:
- Investor fear of economic retaliation from India, including potential trade and diplomatic barriers.
- Concerns over frozen or delayed multilateral aid, crucial for Pakistan’s fragile economy.
- Broader scepticism about the country’s financial trajectory amidst escalating geopolitical isolation.
Agriculture and defence — 2 critical sectors in Pakistan — are already feeling the strain, especially in light of measures like potential airspace closures and suspension of the Indus Waters Treaty.
Moody’s Sounds the Alarm on Pakistan’s Economy
Credit rating agency Moody’s Ratings has flagged Pakistan’s growing vulnerability in the current geopolitical context. According to its latest assessment, heightened and prolonged tensions with India could significantly impede Pakistan’s economic growth, delay fiscal consolidation, and undermine macroeconomic stability.
Moody’s further warns that if diplomatic tensions continue to escalate, Islamabad’s $7 billion IMF bailout programme could be derailed, exacerbating an already fragile economic scenario.
India and Pakistan: A Diverging Economic Trajectory
While both nations face a shared geopolitical crisis, their economic responses are poles apart.
India’s Outlook Remains Robust
- IMF projects 6.8% GDP growth for India in 2025.
- Foreign reserves are ample, and the rupee remains steady.
- Inflation is under control, and the fiscal outlook is stable.
Pakistan Faces Mounting Economic Stress
- GDP projections for Pakistan have been revised down to 2.4%, from an earlier 3.5%.
- Multilateral support is under threat, and debt servicing pressures are intensifying.
- Investor sentiment is deteriorating amid growing political and economic uncertainty.
Conclusion
This episode underscores how geopolitics alone does not dictate market direction. Investor trust, macroeconomic fundamentals, and global cues play a far more decisive role.
While diplomacy remains strained, India’s financial markets continue to operate from a position of strength, whereas Pakistan faces a formidable uphill economic battle. The markets, it seems, are echoing a much larger narrative — one of divergence in economic resilience and global integration.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing.
