Geopolitical Tensions Test South Asian Markets: Why India’s Equity Resilience Outshines Pakistan’s Struggles

The recent Indian military strikes targeting “terrorist camps” in Pakistan have reignited geopolitical tensions in South Asia. While the immediate regional fallout has been significant, the economic consequences have revealed stark contrasts between India’s relative resilience and Pakistan’s fragility. Investors are now grappling with how to navigate this environment, balancing geopolitical risks against structural economic fundamentals.

Stock Markets: Contrasting Resilience and Vulnerability

India’s equity markets proved unexpectedly robust. The BSE Sensex dipped 692 points on the day of the strikes but rebounded sharply, closing 200 points higher by week’s end. Similarly, the Nifty 50 stabilized after an initial selloff. Historical parallels suggest this resilience is no accident: the Sensex surged 37% during the 1999 Kargil War, and the 2019 Pulwama attack triggered only a brief dip before markets resumed their climb.

Analysts attribute this resilience to India’s domestic-driven economy and structural reforms, including trade pacts with the UK and potential U.S. deals. Foreign institutional investors reinforced this stability, injecting ₹43,940 crore in the prior fortnight. Mid-cap stocks faced mild pressure, but large-cap equities—particularly in banking and telecom—remained unshaken.

Pakistan’s markets, however, faltered. The Karachi Stock Exchange (KSE 100) plummeted over 6% in two weeks, with a 3% drop on the day of the strikes. This reflects deeper vulnerabilities: reliance on IMF bailouts, a bloated defense budget (now 30% higher), and inflation exceeding 20%. The underscores how its economy cannot sustain prolonged conflict without severe strain.

Defense Sectors: Opportunity and Constraints

India’s defense sector received a temporary boost, with ₹500 billion allocated to military operations—nearly 10% of its annual defense budget. Firms like Bharat Electronics Limited, which supplies critical equipment, could see increased demand. Yet valuations here are already stretched; the sector’s P/E ratio is near 30x, well above historical averages.

Investors should remain cautious: while geopolitical tensions may sustain near-term gains, long-term value hinges on sustained demand and India’s ability to modernize its defense infrastructure. Pakistan’s defense firms, such as NESCO, face even steeper hurdles. With fiscal deficits at 8% of GDP and access to international financing dwindling, Pakistan’s military spending risks further economic collapse.

Trade and Supply Chains: Costs of Isolation

Cross-border trade in textiles, energy, and agriculture ground to a halt, driving up prices for essentials. Pakistan’s oil import costs could rise by $1.2 billion, exacerbating its balance of payments crisis. India’s suspension of the Indus Waters Treaty and import bans on Pakistani goods have deepened bilateral economic isolation.

Humanitarian costs are staggering: over 250,000 civilians displaced, and ecologically sensitive regions like the Pir Panjal range suffer deforestation and disrupted hydropower projects.

Global Markets: Insulated… For Now

While regional volatility is high, global indices like the S&P 500 remain unaffected, with investors focused on U.S. Federal Reserve policy. However, prolonged conflict could disrupt oil markets——and commodity supply chains, testing global resilience.

Investment Strategies: Prioritize Resilience

• India: Focus on large-cap equities (banks with strong capital buffers, telecom firms), FMCG, and pharma. Avoid overexposure to defense contractors due to elevated valuations.
• Pakistan: Equity valuations are unattractive; the economy’s IMF dependency and currency instability pose systemic risks.
• Global Investors: Monitor geopolitical escalation but avoid overreacting—India’s domestic consumption and fiscal discipline have historically insulated its markets.

Conclusion: A Tale of Two Economies

The May 2025 conflict underscores India’s economic resilience. Its equity markets, supported by strong fundamentals and structural reforms, have shrugged off geopolitical shocks for decades. Pakistan, however, faces an existential crisis: its reliance on military spending and IMF bailouts leaves little room for error.

The defense sector in India offers incremental gains, but investors should prioritize quality large-caps and sectors insulated from regional instability. Meanwhile, Pakistan’s markets remain a high-risk bet. As history shows, India’s economy can weather geopolitical storms—provided tensions don’t escalate into a full-scale conflict. The key now is whether both nations can de-escalate before deeper economic scars take hold.