India’s recent military operation, Operation Sindoor, launched in retaliation for the tragic Pahalgam terror attack, has once again intensified geopolitical tensions with Pakistan. Conducted on May 7, 2025, the operation saw Indian armed forces targeting nine identified sites across the border, marking a bold assertion of military strength and national resolve. These developments have not only reignited long-standing hostilities between the two nuclear-armed neighbours but also sparked immediate responses across political, social, and economic spheres, including the financial markets.
India-Pakistan tensions have historically played a pivotal role in shaping investor sentiment, often creating short-term volatility and long-term policy discussions. Yet this time, in a surprising turn, the swift and decisive nature of Operation Sindoor appears to have bolstered domestic confidence. The perception of strong leadership and national security responsiveness is translating into a positive shift in investor mood, with early indicators pointing toward increased market resilience rather than panic.
While the market performance seemed weak on 6 May (Tuesday), with BSE Sensex falling 0.2% and closing at 80,641, and NSE Nifty-50 declining 0.3%, in light of the tensions and India’s announcement of the mock drills to be conducted all across the nation, the market opened stable on 7 May with the news of the success of Operation Sindoor.
So far as sector-specific response is concerned, the India-Pakistan tensions have affected the media sector adversely, with Nifty Media becoming the top loser.
India, Pakistan Tensions and Stock Market: Historical Trends
Geopolitical tensions significantly influence investor behaviour and financial stability, especially in emerging markets like India. Such events can lead to market volatility, capital flight, and shifts in investor sentiment. Understanding these patterns is crucial for investors and policymakers to navigate the financial implications of geopolitical crises.
Kargil War
In the 1999 Kargil War, Indian markets experienced initial declines. For instance, the Nifty 50 index dropped by approximately 13% before the Kargil conflict escalated. The market surged by 41% during the war and continued its upward trajectory afterwards, with India moving towards a win. Following the Kargil War, the Sensex surged by 39% between May and July 1999.
Despite initial shocks, Indian markets have shown resilience. Post-conflict periods often see a return to growth, driven by factors such as increased defence spending and investor confidence.
The 2008 Mumbai Attacks
The 2008 Mumbai attacks (26/11) had a significant impact on India’s stock market. On November 28, 2008, the Bombay Stock Exchange (BSE) Sensex opened 137 points lower at 8,898.18 but closed 0.73% higher at 9,092. Despite initial losses, the market rebounded, reflecting investor confidence in India’s resilience.
However, the attacks, which occurred amid the global financial crisis, led to a record outflow of $13.5 billion in foreign investments from Indian stocks in 2008. The hospitality sector was notably affected; Indian Hotels Co. Ltd, for instance, saw its stock price drop 17.04% on November 28, 2008, hurt by the uncertainty caused by the attacks. Despite these short-term shocks, the Indian stock market demonstrated resilience, with a swift recovery following the attacks.
Balakot Airstrikes
In 2019, following the Balakot airstrikes, the markets exhibited brief declines, followed by recoveries as the situation de-escalated. This retaliatory measure by India following the Pulwama attack initially triggered significant market volatility. On February 26, 2019, the day when the airstrikes were conducted, the Sensex plunged 1.38% and the Nifty 0.41%.
However, the markets demonstrated resilience in the subsequent days. The Sensex recovered 5% over the next three sessions, indicating a swift rebound as geopolitical tensions began to de-escalate. This pattern aligns with historical trends where Indian markets exhibit initial reactions to geopolitical events but tend to stabilise and recover as clarity emerges.
Impact of India-Pakistan Conflicts on Indian Defence Market
Despite the heightened tensions following Operation Sindoor, India’s defence stocks have displayed resilience, with companies like Hindustan Aeronautics Ltd [NSE: HAL], Bharat Dynamics Ltd [NSE: BDL], and Mazagon Dock Shipbuilders Ltd [NSE: MAZDOCK] maintaining stable performance. This stability suggests that investors are factoring in the long-term growth prospects of making defence sector investments, rather than reacting to short-term geopolitical events.
HAL continues to benefit from its extensive order book and ongoing military contracts with the nation, such as the AL-31FP engine deliveries for the Su-30MKI aircraft. Similarly, MDL’s robust pipeline, including the delivery of destroyers and submarines, underscores its strategic importance in India’s naval capabilities. BDL’s focus on missile systems and defence electronics further positions it as a key player in the sector.
The government’s commitment towards defence industry growth by enhancing defence exports and modernising the manufacturing sector provides a conducive environment for these companies to thrive. While short-term fluctuations are inevitable, the underlying fundamentals of India’s defence sector remain strong, offering investors a balanced perspective amidst geopolitical uncertainties.
How the Market Responds?
Geopolitical escalations often trigger sharp initial reactions due to uncertainty. When information is unclear, such as during surprise military operations or sudden attacks, markets react defensively, pricing in worst-case scenarios. However, as clarity emerges and the government articulates its response, investor anxiety often eases. Clear communication about the scope and intent of military actions or diplomatic steps helps markets reprice risk more accurately and calmly.
The early market drops are typically driven by retail and short-term traders reacting out of fear. This herd behaviour can amplify volatility. In contrast, institutional investors often adopt a more strategic view, focusing on long-term fundamentals. As panic selling fades, strategic investors re-enter, stabilising prices and prompting recovery.
India’s financial markets have matured, with increased participation from institutional investors, enhanced digital infrastructure, and diversified asset bases. This maturity contributes to faster rebounds, as the investor base is more informed and globally integrated. Greater liquidity and better risk management tools further support stability after geopolitical shocks.
How Can Investors Navigate the Stock Markets Amid Escalating India-Pak Tensions?
The turmoil in the Indian geopolitical scenario would significantly affect the stock market, and hence, investors are recommended to be cautious and not panic. A calm, disciplined approach is key.
- Market drops during conflict periods often present temporary dislocations rather than long-term downturns. Panic selling, in such a scenario, can lock in losses just before the market stabilises.
- Defensive sectors like FMCG and IT, along with global-facing businesses, tend to be less impacted by regional tensions. Allocating a portion to safe-haven assets like gold or government bonds can also help balance risk.
- Geopolitical risk is real, but it should be weighed alongside macroeconomic and corporate fundamentals. Hence, consider referring to the reliable financial sources instead of reacting to social media speculation.
- India’s market has consistently recovered from past conflicts, supported by its economic potential and institutional resilience. Hence, investors can expect the same to happen in this case as well.
Conclusion
India-Pakistan tensions continue to test the resilience of India’s financial markets, causing short-term volatility but rarely derailing long-term growth. Historical patterns, from Kargil to Balakot and now Operation Sindoor, reveal that while markets react swiftly to uncertainty, they recover steadily as clarity and policy direction emerge. Sector-specific responses, particularly in defence and media, reflect evolving investor strategies. As markets mature and investor behaviour becomes more informed, strategic patience, diversification, and reliance on credible information remain key. For investors and policymakers alike, understanding these dynamics is essential to navigating geopolitical crises with confidence and long-term perspective.
