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Informist, Wednesday, May 7, 2025

 

By Pratiksha, Aaryan Khanna, and Anjana Therese Antony

 

NEW DELHI – The only way to make sense of the muted reaction of Indian financial markets to the Indian military strike against suspected terror bases in Pakistan and Pakistan-occupied Kashmir early Wednesday is to, perhaps, acknowledge that the reaction shows just how widely the strike was expected.

 

Indian equities and the government bond market almost shrugged off the air strikes and it was only the rupee which fell sharply and is seen to be treading cautiously.

 

Relations between India and Pakistan plummeted following the terror attack at Pahalgam on Apr. 22, in which terrorists killed 25 Indians and a Nepalese citizen. The Indian government accused Pakistan of supporting militants. Both the nations took a raft of measures against each other; India put the critical Indus Waters Treaty in abeyance and Pakistan closed its airspace to Indian airlines.

 

The stock market was expected to be the worst hit as such an escalation in geopolitical tensions prompt foreign portfolio investors to almost immediately turn their backs on the countries involved. While the benchmark domestic indices initially fell, they recovered quickly and went on to settle slightly higher Wednesday. The government bond market, too, had a short-lived reaction, looking to the strike as a peak of the tensions, which would now abate. The Indian currency, however, posted its biggest one-day fall in nearly a month. 

 

"The retaliatory step by India is broadly on expected lines, and I don't think it is escalating in nature," said Anshul Chandak, head of treasury at RBL Bank Ltd. "I think it was measured aggression and passed the message that was needed. I am not worried too much. I don't think geopolitical tensions have dented foreign portfolio investor sentiment. It will be fairly upbeat, unless there is escalation beyond a point." 

 

EQUITIES

India's benchmark equity indices saw a temporary knee-jerk reaction to the aggravated conflict between India and Pakistan and fell close to 1% in early trade Wednesday. Research analysts Informist spoke to said the latest retaliations were expected and investors are not anticipating the situation to turn to a war-like scenario.

 

The near-term macroeconomic factors are in favour of the bulls, such as softer crude oil prices, better prospects of interest rate cuts, the return of foreign institutional investors, and in-line earnings growth for the March quarter so far, research analysts said. A cherry on the top was the latest free trade agreement with the UK, under which the two countries will cut duties in an attempt to boost trade. 

While the odds of a correction in equities cannot be ruled out due to uncertainty in terms of geopolitical tensions and tariffs, experts believe the worst is behind the market and that the market will recoup potential losses in the near term. Though Indian equities have fallen sharply during the five-month correction till February, valuations are still rich from a historical perspective. 

 

"India is likely to command rich multiples, given the growth rate it offers among all the other economies...," said Pankaj Pandey, head of research at ICICI Securities, and added he was not concerned about current valuations due to the growth prospects of the country. Foreign institutional investors have been net investors in the Indian stock market in the last 14 sessions, buying more than INR 440 billion of shares compared to offloading of INR 176 billion worth of equities. 

 

In the worst-case scenario, Pandey does not expect the benchmark Nifty 50 index to fall below 21700 points, which is around the 10-month low the index had hit in April. This is 11% lower from Wednesday's closing level of 24414.40 points. The market has already recovered the minor losses it posted following the terrorist attack at Pahalgam. 

In the near term, market players will continue to monitor global updates on the diplomatic relations between India and Pakistan as well as news flows related to tariffs. US President Donald Trump going back and forth with tariff policies has been causing volatility in global markets, including in India. 

 

RUPEE

The impact of escalation between India and Pakistan was the most on the Indian currency, which fell sharply in the offshore non-deliverable forwards market shortly after the news and went on to open almost 20 paise lower at 84.6250 a dollar in the spot market. With dampened risk sentiment among investors, the domestic unit fell to a low of 84.9300 a dollar during the day, and settled at 84.8250. 

 

Market players were extremely watchful of further developments on the India-Pakistan front throughout the day. In fact, the local currency hit the day's low after traders took into account the news of Pakistan claiming to have shot down five Indian fighter aircraft and unmanned aerial vehicles in the early hours of Wednesday morning. 

 

"Given the geopolitical situation and the strike now, broadly everyone will be looking at how things will pan out and because of that there will be a cautious approach by most of the market participants," said Ashhish Vaidya, managing director and country treasurer at DBS Bank India.

 

While most market participants now expect the rupee to depreciate further if relations between the neighbours worsen, some players are of the view that the local unit may have seen the worst on Wednesday itself. In case of further escalation of the conflict, most traders see the rupee falling to 85.00-85.50 a dollar levels that it has seen in the recent past. 

 

GILTS

Government bond yields were expected to rise Wednesday after the airstrike and traders were expected to de-risk their portfolios by selling bonds. From 6.35% Tuesday, some dealers feared the 10-year benchmark gilt yield would jump to as high as 6.42% during the day.

 

However, after opening almost flat, yields rose only briefly before being bought into and were at or below the previous close within a few minutes. Robust demand from banks, both state-owned and private sector, above 6.35% yield on the 10-year benchmark helped keep yields in check. Traders said that they had largely expected a retaliatory strike from India to the terrorist attack and the details of the attack suggested that a further escalation was unlikely.

 

Moreover, comments from Indian and Pakistani officials through the day also did not point to any immediate retaliation from Pakistan. This suggested the two nuclear powers may resolve the issue through diplomatic means rather than further military measures, dealers said. Trade through the day was choppy as uncertainty prevailed and the 10-year benchmark yield briefly fell to 6.33?fore rising. Another significant positive for the gilts market was that foreign portfolio investors did not make any large moves, including dumping India's bonds as some had feared, even after the strike, dealers said.

 

"I am waiting for another 2-3 basis points rise in gilt yields to buy, but really, even seeing 6.37-6.38% (on the 10-year benchmark gilt yield) seems unlikely from here on," said Sudarshan Nambiar, head of trading at YES Bank, early in the day. "The gilt market had already corrected due to the border tensions. There shouldn't be a long-term impact from the market perspective."  End

 

Edited by Akul Nishant Akhoury

 

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