INDIA RUPEE: Indian Forex Markets Defy Geopolitical Jitters Amid Cross-Border Strikes

The recent India-Pakistan military standoff, triggered by India’s Operation Sindoor on May 7, 2025, tested the resilience of financial markets. Yet, despite the heightened tensions, India’s currency and equity markets have proven remarkably unfazed. The rupee, while briefly pressured, remained anchored by strong fundamentals, while Pakistan’s economy faced a crisis. This divergence underscores the widening economic chasm between the two nations.

The Rupee Holds Steady Amid Crossfire

The Indian rupee faced modest downward pressure immediately after the strikes, with the 1-month non-deliverable forward (NDF) rate rising to 84.64–84.68 against the US dollar—a slight decline from 84.4325 the prior day. Yet, the currency remained near its three-month highs, reflecting broader confidence in India’s economic stability.

Analysts note that the Reserve Bank of India (RBI) has signaled its readiness to intervene if volatility becomes “disorderly.” This assurance, combined with India’s robust foreign exchange reserves ($535 billion as of April 2025), has kept investor panic in check.

Equity Markets: A Barometer of Resilience

India’s stock markets provided further evidence of resilience. The Nifty 50 and BSE Sensex closed in positive territory on May 7, gaining 0.24% and 0.21%, respectively, even as global markets reacted nervously. Over the two weeks since the April 22 Pahalgam terror attack, the Nifty has risen 1%, outperforming global peers.

Historical parallels reinforce this resilience. During past conflicts—such as the 1999 Kargil war and 2001 Parliament attack—the Nifty 50 averaged a 5.27% dip but rebounded with 7–19% gains within six months. Analysts at Anand Rathi argue this pattern suggests markets view the current strikes as a “measured, non-escalatory response” rather than a full-blown crisis.

Pakistan’s Economic Crisis: A Mirror Image

In stark contrast, Pakistan’s markets collapsed. The Karachi Stock Exchange (KSE-100) index plummeted 6% over two weeks, with a 5.5% intra-day drop on May 7. The rupee’s fate, while not explicitly detailed, is likely dire. Pakistan’s economy, already dependent on IMF bailouts and inflation exceeding 23%, faces existential risks. Moody’s warns that sustained tensions could drain its foreign exchange reserves—insufficient to cover debt repayments for years—and derail its IMF-backed stabilization program.

Why India’s Markets Held Steady

1. Strong Fundamentals: India’s 6.5% GDP growth projection for 2025, driven by domestic consumption and public investment, provides a buffer.
2. Foreign Investor Confidence: Foreign institutional investors (FIIs) injected ₹43,940 crore into equities over two weeks, a vote of confidence in India’s long-term growth story.
3. Limited Direct Exposure: Trade with Pakistan accounts for less than 0.5% of India’s exports, minimizing spillover risks.
4. Geopolitical Calculus: India’s strikes, targeting terror infrastructure rather than military assets, were framed as “proportional” and “non-escalatory,” reducing fears of a full-scale war.

Risks on the Horizon

While markets currently price in a contained conflict, risks persist:
- Pakistan’s Response: If Pakistan retaliates with significant military action or economic sanctions, the rupee could face renewed pressure.
- Global Sentiment: The US Federal Reserve’s May policy decision and global trade dynamics remain key variables.

Conclusion: A Tale of Two Economies

The May 2025 crisis has starkly highlighted India’s economic resilience versus Pakistan’s fragility. India’s markets, buoyed by strong domestic demand, foreign inflows, and the RBI’s credibility, have shrugged off geopolitical noise. The rupee’s stability—despite transient dips—reflects investor faith in India’s ability to navigate crises.

In contrast, Pakistan’s markets and economy face a perfect storm: external debt, inflation, and the impossibility of sustaining prolonged conflict. As Geojit’s Dr. VK Vijayakumar notes, “Pakistan cannot afford to escalate—a reality that incentivizes de-escalation.”

For investors, the lesson is clear: India’s diversified economy and strong macroeconomic anchors make it a relative safe haven, even in turbulent times. The rupee’s performance since April 2025—up 1.5% against the dollar—is testament to this resilience. While geopolitical risks remain, they are now priced in, leaving the door open for opportunistic buying in sectors like technology and consumer goods, which have shown the most consistent growth.

In the end, the markets have spoken: India’s economy, like its currency, is far from fragile.