Geopolitical Volatility in the Subcontinent: Navigating Investment Risks Amid India-Pakistan Tensions

The India-Pakistan border crisis, escalating in May 2025, has introduced significant geopolitical and economic volatility. Military engagements, civilian casualties, and diplomatic spats have rattled markets, with both nations facing divergent economic risks. This article explores the investment implications, focusing on equities, forex, defense sectors, and geopolitical incentives for de-escalation.

Equity Markets: Resilience in India, Crisis in Pakistan

India’s equity markets have shown relative resilience despite the tensions. The BSE Sensex fell 0.6% to 24,273 on May 8, while the Nifty 50 index dipped slightly, supported by foreign investor confidence and structural growth drivers. However, defensive sectors like pharma and telecom emerged as safe havens:
- Sun Pharmaceutical (SUNPHARMA) and Dabur (DABUR) outperformed, with stable earnings and low sensitivity to geopolitical risks.
- Jio Platforms (RELIANCE) benefited from its diversified portfolio, including digital services.

In contrast, Pakistan’s KSE 100 index plummeted 7.2% on May 8, with further losses forcing trading halts. The crisis has exacerbated Pakistan’s existing vulnerabilities:
- Currency depreciation and IMF bailout dependency have eroded investor confidence.
- Bank stocks, including Habib Bank (HABIBMETL), fell sharply, reflecting systemic risks from prolonged conflict.

Foreign Exchange Markets: Rupee Weakness Signals Risk Premium

The INR/USD exchange rate rose to 85.80 by May 9, a 2.2% decline from April lows of 84.00. Implied volatility surged, with near-term contracts spiking 40% since April 15. Analysts note two critical triggers:
1. A USD/INR breach of 86 could signal broader market stress.
2. India’s Volatility Index (VIX), up 10% on May 8, highlights investor anxiety.

Historical parallels suggest recovery potential:
- Post-1999 Kargil War, India’s Sensex rose 37% over six months.
- However, the current conflict’s depth—marked by Operation Sindoor strikes using Rafale jets and SCALP missiles—poses unique risks.

Defense Sectors: Opportunities Amid Caution

India’s defense stocks saw mixed reactions:
- Bharat Forge (BORALF) and BEML (BEML) gained investor interest, though valuations remain stretched. BEML, trading at 13x forward earnings, offers better value than Solar Industries (SOLINDA) at 59x.
- TATA PowerStr Limited (TATAPOWER) stands out for its exposure to both defense and infrastructure spending.

Analysts warn against “war-hysteria speculation”:
- V.K. Vijayakumar (Geojit) advises prioritizing firms with stable order pipelines, such as Larsen & Toubro (LT), which benefits from defense and civil engineering contracts.

Geopolitical Incentives: De-escalation or Prolonged Conflict?

Both nations face incentives to avoid escalation:
- India’s manufacturing ambitions rely on foreign investor confidence. FPI inflows of ₹43,940 crore over 14 days underscore this resilience.
- Pakistan’s economy, already on “life support” with IMF loans, cannot afford prolonged conflict. Its KSE 100’s 7.2% drop signals market fragility.

However, risks persist:
- Civilian casualties (16 in Indian Kashmir, 31 in Pakistan) and infrastructure damage fuel public anger, complicating diplomatic solutions.
- Pakistan’s airspace closures and India’s counter-drone operations highlight military readiness for escalation.

Investment Strategies: Navigate Volatility with Discipline

1. Focus on Quality Large-Caps:
2. Pharma (SUNPHARMA, DABUR) and telecom (RELIANCE) offer stability.

3. Avoid mid/small-caps and banks (e.g., Nifty PSU Bank index fell 4.8% on May 8).

4. Defense with Caution:

5. Prioritize BEML (13x PE) and LT over overvalued peers.

6. Monitor TATAPOWER for dual exposure to defense and infrastructure.

7. Monitor Geopolitical Triggers:

8. A USD/INR breach of 86 or further VIX spikes signal broader stress.
9. Cross-border ceasefire violations or new military operations could reignite volatility.

Conclusion

The India-Pakistan crisis has introduced near-term market turbulence, but structural factors suggest recovery potential. India’s resilient equity markets and FPI inflows contrast with Pakistan’s economic fragility, where the KSE 100’s 7.2% decline underscores systemic risks. Investors should prioritize defensive sectors and disciplined defense plays while monitoring key indicators like the USD/INR rate and VIX volatility. History suggests markets rebound—provided de-escalation occurs—but prolonged conflict could rewrite this narrative. As the saying goes: “Buy the dip—but only if you can stomach the ride.”