Missile Tests and Military Drills: How the India-Pakistan Standoff Impacts Investments

The India-Pakistan standoff over Kashmir has escalated to new heights in 2025, with Pakistan conducting two missile tests and both nations engaging in military drills. While the immediate threat of full-scale war remains low, the geopolitical tension is casting a shadow over regional economies and global investment strategies. Here’s how investors should assess the risks and opportunities.

The Geopolitical Flashpoint
The crisis reignited after a deadly April 22 attack in Pahalgam, Indian-administered Kashmir, which killed 26 people. New Delhi blamed Pakistan-based militants, while Islamabad denied involvement. The fallout has led to artillery exchanges along the Line of Control (LoC), emergency drills, and civilian evacuations. On May 3 and 5, Pakistan test-fired the Abdali (450 km range) and Fatah (120 km range) ballistic missiles, framed as defensive measures to deter Indian aggression. In response, Indian Prime Minister Narendra Modi granted his military “full operational freedom,” raising fears of further escalation.

Economic Fallout: Pakistan on the Brink
Pakistan’s economy, already fragile, faces severe strain. The International Monetary Fund (IMF) had approved a $7 billion bailout in 2024, but tensions are undermining progress. Moody’s downgraded Pakistan’s 2025 GDP growth forecast to 2.6%, citing reduced trade with India and geopolitical risks. Key vulnerabilities include:
- Trade Disruptions: India’s suspension of bilateral trade (worth $305 million in 2024) has created shortages of pharmaceuticals and chemicals, critical for Pakistan’s industries.
- Water Security: India’s suspension of the Indus Waters Treaty threatens Pakistan’s agriculture sector, which contributes 24% of GDP.
- Fiscal Weakness: Pakistan’s fiscal deficit stands at 7.4% of GDP, with foreign reserves at $10.2 billion—far below the $686 billion held by India.

The State Bank of Pakistan cut interest rates to 11% in May to spur growth, but inflation remains volatile, with food prices surging (e.g., rice to Rs 340/kg). The World Bank warns 10 million Pakistanis could face extreme food insecurity this year.

India: Limited Direct Impact, but Risks Linger
India’s economy is less exposed to the crisis due to minimal bilateral trade, but challenges persist:
- Defense Spending: Modi’s government faces pressure to boost military budgets, potentially delaying fiscal consolidation.
- Diplomatic Fallout: Sanctions or reduced foreign investment could strain India’s external relations, though its $4.2 trillion economy provides a buffer.

Global and Regional Reactions
- IMF’s Crucial Role: Pakistan’s survival hinges on IMF disbursements. A delayed $1 billion tranche, pending staff-level agreements, could trigger a default.
- Iran’s Mediation Efforts: Iran’s offer to mediate reflects regional unease, but diplomatic progress remains elusive.
- China’s Influence: Pakistan’s reliance on Chinese defense imports (fighter jets, submarines) underscores its strategic vulnerabilities.

Investment Implications
1. Pakistan’s Markets: Investors should brace for volatility. The PKR (1 USD = 280.95 PKR) and stocks like Lahore Stock Exchange (LSE) are highly sensitive to geopolitical news. Avoid sectors reliant on imports from India, such as pharmaceuticals.
2. India’s Defense Sector: Companies like Bharat Electronics (BOB) and Hindustan Aeronautics (HAL) could benefit from increased defense spending, though broader market exposure remains limited.
3. Regional Stability Plays: Energy and infrastructure projects in neutral countries like Iran or Malaysia may attract capital fleeing volatility.

Conclusion
The Kashmir standoff is a geopolitical and economic minefield. Pakistan’s economy teeters on IMF support, with growth forecasts slashed and food insecurity rising. India, while insulated economically, faces fiscal trade-offs and reputational risks. Investors must weigh the likelihood of de-escalation against the potential for prolonged instability. Key data points—Pakistan’s 2.6% GDP growth forecast, its $10.2 billion reserves, and India’s 7.4% fiscal deficit—underscore the fragility of the region.

In this climate, caution is paramount. Monitor IMF disbursements, water treaty developments, and military posturing. For now, the markets will remain hostage to every headline from the LoC.