Introduction
The India-Pakistan relationship is always sensitive. Whenever there is tension between the two countries, the repercussion is felt in global and domestic markets. In the worst-case situation of a war, India would theoretically take a sharp hit on the stock market. This blog attempts to understand in-depth how any such geopolitical crisis would impact Indian equities, sectors, investor sentiment, and the economy in general.
Historical Context: How Indian Markets Reacted on Past Conflicts
Learning the historical behavior of Indian stock indices during past Indo-Pak conflicts brings insights:
1999 Kargil War
- During the conflict period, Nifty fell 12% in the first month.
- Most defensive sectors such as FMCG and pharma did relatively well.
- Rebound of three months followed after the war ended.
2001 Parliament Attack and 2016 Uri Surgical Strike
- The reaction in the market was of short-term volatility.
- Short-term rise in FII outflows.
- Government and RBI took stabilizing steps.
War in India Immediate Effect on Economic Market
1. Drops in sharp indices (Sensex & Nifty)
Markets capitulate during war panic and finally pull the benchmark indices down.
Nifty 50 and Sensex may slide 5% to 10% lower for the first few trading sessions.
2. Behavior of FII and DII
Mostly FIIs withdraw or liquidate funds out of risk aversion.
Hence DIIs usually cheerfully walk-in based on the conflict phase.
The import price and inflation will raise due to rupee depreciation.
3. Rise in prices of commodities
They are likely to leap because of the fear of global instability.
This would cause India to face much wider trade deficits since it is a net importer.
These sectors of the stock market – aviation & paint, as well as logistics – would be affected.
Sector-Wise Impact Analysis
| Sector | Impact | Reason |
| Defense & PSU | ⬆️ Positive | Increased defense budgets, demand for arms and equipment |
| FMCG & Pharma | ➖ Neutral | Defensive stocks, stable demand |
| IT & Tech | ⬇️ Negative | Exposure to global clients, currency fluctuations |
| Banking & Finance | ⬇️ Negative | Credit risk, low consumer sentiment, foreign outflows |
| Infrastructure | ⬇️ Negative | Delay in projects, reduced government capex |
| Oil & Gas | ⬆️ Mixed | Upstream companies benefit, downstream hurt by higher crude prices |
Mid to Long-Term Impact
1. Higher fiscal deficit
- War increases government expenditure.
- Less allocation for growth and infra development.
2. Inflationary pressure
- Prices for food, fuel, and life essentials may increase.
- RBI faces a dilemma about whether or not to increase rates.
3. Rebound of Investor Sentiment
- Markets will bounce back soon if the war is short-lived and decisive.
- For example, after Uri and Balakot airstrikes, Nifty bounced back in weeks.
How Should Investors React?
What to do
- Invest in defensive sectors.
- Keep cash ready for buying on dips.
- Diversify into gold, US stocks, or fixed income.
What not to do
- Avoid panic selling.
- On the other hand, avoid over-leveraging or speculative trades given the uncertainty that we are facing.
- Give a wide berth to any high-beta small caps.
Conclusion
An India-Pakistan war would inevitably create havoc in the Indian stock market, albeit for a short while. But as has happened in the past, the market recuperates self after the disappearance of doubt. The most important thing for investors is to maintain discipline, diversify strategies, and avoid knee-jerk reactions. Stay informed, stay calm, and stay invested with a long-term view.