Markets turn nervous watching India and Pakistan ramp up military action

• The Sensex lost as much as 600 points today as Indo-Pak tensions escalated.
  
• Any escalation in the conflict could further dent investor sentiment.
  
• The rupee is likely to lose value as risk aversion tends to push traders to seek the safety of the American dollar.
  

The Sensex lost as much as 600 points today as Indo-Pak tensions escalated. Though there was a sharp recovery by the end of the day, the benchmark equity index closed 68 points lower for the day. The rupee also fell by ₹0.41 against the dollar.

Any escalation in the conflict could further dent investor sentiment. The currency is likely to lose value as risk aversion tends to push traders to seek the safety of the American dollar.

The damage was much larger across the border at the Karachi Stock Exchange, which fell by 4%.

Escalating tensions

In the early hours of February 26th, a fleet of 12 Indian jets bombed a number of suspected terrorist hideouts across the Line of Control (LoC) in Pakistan-occupied Kashmir, killing around 300 alleged terrorists. This was followed by a retaliation from Pakistan, which launched its own strikes across the LoC, capturing $4 in the process.

In the immediate aftermath of the Pulwama attack on February 14th, the Sensex fell for $4 - its worst streak in eight years. Foreign investors pulled out around ₹62 billion from India’s markets in the three days following the attack.

However, on Tuesday, Foreign Institutional Investors (FIIs) bought shares worth ₹1,674.17 crore while Domestic Institutional Investors (DIIs) sold ₹720.27 crore worth of shares in the Indian equity market on February 26, despite the worsening geopolitics in the subcontinent.

Geopolitical stability is always an important factor whe foreign investors evaluate investment opportunities in emerging markets. FPIs have already been hesitant to invest in India amid the rise in oil prices, global trade tensions and concerns of fiscal slippage by the Modi administration.

If the current tensions persist, the outflows will likely continue. This will be exacerbated by investors’ wait-and-watch stance ahead of general elections in May. Not only will this hurt India’s currency, but it could provide a dampener on economic growth.


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