India Stocks Surge 2.5% on Ceasefire, FII Inflows Revive

The India-Pakistan ceasefire agreement announced on May 12, 2025, triggered one of the strongest rallies in Indian equity markets in over six months. The BSE Sensex and Nifty50 indices surged 2.4% and 2.5%, respectively, with broader indices like the Nifty MidCap and SmallCap also climbing sharply. This relief rally, fueled by reduced geopolitical risk and revived foreign investor sentiment, highlights the critical interplay between politics and markets.

The Ceasefire Catalyst

The agreement, confirmed by Indian External Affairs Minister S. Jaishankar, marked a critical de-escalation after months of heightened border tensions. The immediate market response was dramatic:
- The Sensex jumped 1,981 points to an intraday high of 81,435, while the Nifty50 rose 600 points to 24,608.
- Over 2,846 stocks rose, with Realty and Power sectors leading gains, up 3.2% and 2.8%, respectively.

The ceasefire alleviated fears of a prolonged conflict, which could have disrupted economic activity and investor confidence. Analysts noted the deal’s psychological impact: “Markets had been pricing in a tail risk of war. Its removal is a major positive for risk appetite,” said Rahul Bhanot, Head of Research at Emkay Global.

Foreign Investor Sentiment Shifts

The rally was amplified by a revival of foreign portfolio investor (FII) inflows, which had been negative for months due to global dollar strength and U.S. policy uncertainties. Key data underscores the shift:
- April 2025 FII inflows: ₹4,223 crores net purchases, reversing months of outflows.
- 16-day buying streak: FIIs have been net buyers for 16 consecutive sessions before May 12, signaling renewed confidence.

The ceasefire’s timing coincided with progress in U.S.-China trade talks, which further eased global trade tensions. This twin de-escalation bolstered risk-on sentiment, drawing funds back into emerging markets like India.

Sectoral Winners: Largecaps and Growth Sectors Lead

The rally was broad-based, with largecap stocks and sectors tied to economic recovery leading the charge:
- Financials: ICICI Bank (ICICIBANK.NS), HDFC Bank (HDFCBANK.NS), and Chola Finance surged on hopes of lower interest rates.
- Automobiles: M&M (M&M.NS) and Eicher Motors climbed as investors bet on a revival in consumer demand.
- Digital Economy: Paytm (PAYTM.NS) and Eternal rose amid optimism around tech adoption and infrastructure spending.

Analysts highlighted the revival of systematic investment plans (SIPs), which saw ₹26,632 crores inflows in April. While SIP stoppage rates remain a concern, the market’s breadth—2,846 stocks rising—suggests a shift from sectoral to broad-based optimism.

Underlying Fundamentals: India’s Strong Macroeconomic Tailwinds

The rally was not solely geopolitical; India’s robust fundamentals provided critical support:
- GDP growth: Projected at 6% for FY2025-26, one of the highest among major economies.
- Inflation: Core CPI at 4.8%, within the Reserve Bank of India’s (RBI) 2-6% target range.
- Monetary policy: The RBI’s rate-cut cycle, with rates at 6.25%, supports corporate and consumer liquidity.

These factors position India as a favored destination despite global slowdowns. Pakistan’s Karachi 100 index also surged 9% on the ceasefire, underscoring regional stability’s value to markets.

Challenges Ahead: Ceasefire Durability and FII Momentum

While the rally is significant, risks remain. Analysts caution that:
- Ceasefire adherence: Any renewal of hostilities could reverse gains.
- FII sustainability: Continued inflows depend on global macro factors, including U.S. interest rates.

The market’s performance since May 12 will hinge on these variables. A sustained ceasefire and further FII inflows could push the Sensex toward 85,000, but geopolitical or macroeconomic shocks could trigger a correction.

Conclusion: A Rally Rooted in Relief, Fundamentals, and FII Hope

The May 12 surge was a confluence of geopolitical relief, improved FII sentiment, and India’s strong economic underpinnings. With the Sensex and Nifty50 at multi-month highs, investors are betting on a durable ceasefire and a pickup in global risk appetite.

Crucial data points affirm the bullish case:
- Sector breadth: Over 2,800 stocks rising indicate broad investor optimism.
- FII inflows: ₹4,223 crores in April, with 16 straight days of net buying.
- Fundamentals: 6% GDP growth and declining inflation justify India’s valuation premium.

However, the path forward is not without hurdles. Sustained gains will require the ceasefire to hold and FII inflows to remain robust. For now, the market’s message is clear: geopolitical peace and strong fundamentals are the twin pillars of India’s equity story in 2025.