Assessing Geopolitical Risk in South Asia: The U.S.-Pakistan-India Triangle and Its Impact on Emerging Market Investments

The U.S.-Pakistan-India triangle has long been a fulcrum of geopolitical tension, but in 2025, it has also become a critical determinant of emerging market investment strategies. As the United States recalibrates its South Asia policy to align with strategic, economic, and security priorities, investors must grapple with a shifting landscape of risks and opportunities. The recent May 2025 India-Pakistan conflict—a four-day escalation of cross-border strikes following the Pahalgam terror attack—serves as a stark reminder of the volatility inherent in the region. Yet, it also underscores how U.S. policy interventions and market dynamics are reshaping the investment calculus for South Asia.

The U.S. Policy Shift: From Aid to Strategic Leverage

The Trump administration's pivot from traditional foreign aid to infrastructure-driven development has redefined the U.S. role in South Asia. By 2025, 80% of USAID programs had been terminated, with funding redirected to projects like India's National Investment and Infrastructure Fund (NIIF) and liquefied natural gas (LNG) expansions. This shift reflects a broader strategy of aligning U.S. economic and security interests through infrastructure, critical minerals, and energy partnerships. For India, this means a surge in U.S. investment in sectors like ports, airports, and renewable energy, bolstering its position as a global manufacturing hub.

However, the U.S. maintains a dual-track approach: while deepening strategic ties with India, it continues to extend Major Non-NATO Ally (MNNA) status to Pakistan. This status grants Islamabad privileged military cooperation and access to U.S. defense systems, despite concerns over counterterrorism performance and economic instability. The lack of accountability for MNNA benefits has drawn criticism, with growing calls for conditional revocation tied to reforms in governance and security cooperation.

The India-Pakistan Conflict: Market Volatility and Investor Sentiment

The April 2025 Pahalgam attack and subsequent military escalation between India and Pakistan exposed the fragility of investor confidence. The Indian rupee depreciated 1.4% in two days, while equities initially underperformed historical averages. However, a U.S.-brokered ceasefire on May 10 triggered a rebound in Indian equities, outperforming benchmarks despite continued currency weakness. This divergence highlights a critical insight: geopolitical events often impact sentiment more than tangible economic outcomes.

For investors, the lesson is clear: diversification must account for both macroeconomic fundamentals and the psychological toll of regional instability. While India's robust growth forecast (6.4–6.7% for FY 2026–2027) and low inflation (2.8%) make it a compelling long-term bet, short-term volatility remains a hurdle. Similarly, Pakistan's economic woes—debt-to-revenue ratios above 80%, dwindling foreign reserves—pose risks for investors seeking exposure to its market.

Strategic Diversification: Sectors and Sectors to Watch

1. Infrastructure and Critical Minerals: U.S. investments in India's infrastructure, such as NIIF projects in Goa and Andhra Pradesh, are reshaping trade corridors and energy access. Investors should prioritize companies involved in port development, LNG terminals, and renewable energy projects. For example, India's Adani Green Energy and NTPC Limited are positioned to benefit from U.S.-backed energy initiatives.
2. Defense and Technology: The U.S. is leveraging its MNNA status with Pakistan to secure counterterrorism cooperation while deepening defense partnerships with India. Investors might explore Indian defense firms like Larsen & Toubro or Bharat Dynamics, which are likely to see increased U.S. collaboration.
3. Currency Hedging: The U.S. dollar's devaluation in 2025 has created mixed outcomes for emerging markets. While India's export-driven sectors have gained, dollar-denominated debt burdens for countries like Pakistan have intensified. Investors should consider hedging rupee exposure through derivatives or diversifying into local currency bonds where yields justify the risk.

The Path Forward: Resilience in Uncertainty

The U.S. policy shift toward conditional strategic privileges—such as linking Pakistan's MNNA status to counterterrorism progress and economic reforms—signals a more transactional approach to South Asia. For investors, this means prioritizing adaptability:
- Active Portfolio Management: Rebalancing toward mid- and small-cap stocks in India's infrastructure and technology sectors, which offer growth potential amid volatility.
- Geopolitical Risk Mitigation: Diversifying across South Asian markets (e.g., Indonesia, Thailand) to reduce overexposure to India-Pakistan tensions.
- Engaging with Policy Trends: Monitoring U.S.-India trade negotiations, which could unlock new market access for Indian exports and attract foreign capital.

The U.S.-Pakistan-India triangle remains a volatile yet fertile ground for investment. By aligning portfolios with U.S. strategic priorities, hedging against currency and geopolitical risks, and focusing on sectors poised for U.S.-backed growth, investors can navigate the complexities of South Asia's emerging markets with resilience. As the region's economic and political dynamics evolve, the ability to adapt will separate prudent investors from the rest.