India’s escalating conflict with Pakistan could put at risk its image as a ‘safe haven’ amid global economic turmoil, as the hostilities look set to loom large over foreign investors’ recent $5 billion buying spree in the country’s markets, analysts said on Wednesday.
Tensions between the two nuclear-armed neighbours had been escalating since last month after Islamist militants shot and killed 26 people in Indian Kashmir. India had earlier said two of three suspects in the tourist attack were Pakistani nationals, without offering any evidence.
On Wednesday ties between the two nations significantly deteriorated as India struck nine sites it said were “terrorist infrastructures” in Pakistan and Pakistani Kashmir.
Also on AF: Asian Currencies Soar as Investors Dump The US Dollar
Pakistan said at least 26 civilians had been killed in the strikes, and accused India of igniting “an inferno in the region”. The country also vowed to respond to India’s “blatant violation of its sovereignty”, though its Defence Minister Khawaja Asif later said Pakistan was willing to “wrap up this tension” if India “backs down.”
The strikes, which occurred in the early hours of Wednesday, rattled India’s futures markets and led equity benchmarks Nifty 50 and BSE Sensex to open trade nearly 1% down. The indices swiftly recovered, however, ending the volatile day marginally higher, up by 0.14% and 0.13% respectively.
In contrast, the Karachi Stock Exchange slumped more than 6% in early trade before halving those losses to close down by 3.13% after shedding 3560 points.
While the sharp contrast in their market reactions stems from India and Pakistan’s vastly opposite economic realities, it also speaks to the strength of investor sentiment around India.
The country has quickly emerged as a safe haven for investors fretting over an escalating trade war sparked off by US President Donald Trump. Indian markets have, in fact, performed well since Trump unveiled a slate of huge tariffs on America’s trading partners.
“The Indian market had begun to outperform on the back of the perception that there is some insulation from Trump tariffs given the strength of domestic consumption and a clear signal of monetary loosening from the central bank,” Sat Dhura, portfolio manager at Janus Henderson Investors, told Reuters.
According to Indian business news platform Livemint, foreign investors have ploughed a whopping $5 billion (Rs 43,940 crore) into the country’s equities since April — a buying spree that has lasted for 14 consecutive trading sessions.
During this period Indian indices have gained more than 9% in market value, Mint reported on Wednesday, while quoting analysts as saying that foreign investors’ optimism on India was also buoyed by a weak dollar and slower growth in the US and China. Effectively, Indian equities have been among the best-performing of the world’s big stock markets since early April.
Fear and hope
Much of that optimism, however, is now clouded by Indian strikes on Pakistan, and their potential impact.
On Wednesday, despite global calls for calm, the two neighbours continued to exchange intense shelling and heavy gunfire across the “line of control”, their de facto border in Kashmir, police and witnesses told Reuters.
Former military officers and experts say that recent moves by India and Pakistan to significantly upgrade their military capabilities pose increased risks of conflict between the two.
Furthermore, Michael Kugelman, a Washington-based South Asia analyst and writer for the Foreign Policy magazine, said that “given the scale of the Indian strike… we can expect a sizeable Pakistani response.”
Janus Henderson Investors’ Sat Dhura noted that these “recent events are likely to keep foreign investors away,” from India.
UAE-based asset manager NAV Capital also said that the geopolitical flare-up may temper immediate foreign portfolio flows into India but added that it expected global investors to remain in the country, as long the latest conflict does not spiral.
The little immediate impact on India’s equity, currency and bond markets reflects investors’ view — for now — that full-fledged conflict may be unlikely.
Experts at think tank Atlantic Council noted that India’s strikes and Pakistan’s responses so far “follow a predictable pattern” and that an escalation of hostilities between the two appeared “unlikely”.
“If there is a cessation of hostilities like there should be, pragmatically and practically, the investment climate may not actually be harmed,” said Ajay Marwaha, head of fixed income at Mumbai-headquartered investment house Nuvama Group.
India’s trade deals, growth in focus
Analysts say foreign investors could continue buying Indian equities if the country’s economic outlook stays strong. And several factors could play in India’s favour as long as the conflict with Pakistan does not escalate further.
For one, India’s $4 trillion economy has limited direct trade with Pakistan.
There’s also the fact that previous conflicts have not had a lasting impact on Indian assets. Citibank analysts wrote in a note on Wednesday that in the last such flare-up with Pakistan, in February 2019, the Indian rupee held steady and bond yields rose 15 basis points over that month but retreated later.
The Indian rupee closed nearly 0.5% lower against the US dollar on Wednesday, marking its worst performance since April 9.
In June 2020, when fighting broke out between Indian and Chinese troops in the Galwan valley, the rupee weakened 1% but regained ground as the two sides disengaged, Citi analysts said.
India is also expected to remain the fastest-growing major economy with its central bank forecasting GDP growth of 6.5% this financial year.
And India’s ability to seal key trade deals could also boost its favourability among foreign investors. New Delhi sealed a long-negotiated trade agreement with the UK on Tuesday and discussions are ongoing for a bilateral trade agreement with the US.
“While sentiments are likely to be jittery in the immediate term, these tensions are unlikely to derail the medium-term appeal of the Indian economy,” Radhika Rao, senior economist at DBS Bank in Singapore told Reuters.
Meanwhile, former top government bureaucrat Subhash Chandra Garg also noted that the ongoing hostilities with Pakistan were unlikely to result in a pause in the recent influx of investment into India by global manufacturers such as Apple, Samsung and Google.
The areas bordering Pakistan are in the north and west of India but most foreign investment for manufacturing facilities is centred in southern and central India, Garg noted.
The impact of the conflict between India and Pakistan on any potential longer-term investment “may not be very much”, he added.
- Vishakha Saxena, with Reuters
Also read:
US Says One of its First Trade Deals Will be With India
Apple Will Shift Production of US iPhones to India, FT Says
Apple Stock Soars as iPhones Airlifted From India ‘to Beat Tariffs’
India Likely to Defy Auto Lobby, Cut EV Levies to Appease Trump
India Eyes $23bn in Tariff Cuts on US Imports to ‘Save Exports’
Fears of Reciprocal Trump Tariffs Wipe $180bn Off Indian Stocks
