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Will current geopolitical conflicts impact the Indian economy?
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6 min read | Updated on May 15, 2025, 12:27 IST
SUMMARY
Geopolitical tensions, particularly the recent escalation between India and Pakistan, create heightened market volatility. Historical trends show that India’s markets tend to recover quickly and remain resilient over the long term. This article explores the market’s response to geopolitical risks, historical recovery trends, sectoral performance and the broader impact on India-Pakistan trade.
Indian markets have historically recovered quickly post conflicts
Geopolitical tensions, particularly those between India and Pakistan, directly impact India’s financial markets and the economy. The latest escalation in these tensions had led to heightened volatility in Indian equities. While geopolitical conflicts often lead to an initial market sell-off, despite the uncertainty, India’s markets have shown resilience in the long term.
Looking at past instances of global conflicts
Historical data across nine conflict episodes indicates that the Nifty typically recovered in average 9 -11 days from losses caused by events of conflict and reached pre-event levels.
The average decline to the bottom during these events has been a relatively modest ~3.7%. Interestingly, during the recovery phase, the Nifty often outperforms the MSCI Emerging Markets (MSCI EM) index, with average outperformance of 3%, highlighting the relative strength of the Indian market.
To be very clear, we are in no way implying that any conflict (whether between India and its neighbours or at a global level), should be construed as an opportunity to make gains. The point here is very simple, conflicts typically tend to create volatility which may shake an investor’s faith. Decisions taken in a hurry could adversely impact one’s financial well being. As such the purpose here is to make the readers aware of the historical trends, to enable you to make better decisions.
Performance of Indian markets during and after conflict periods
| Date | Attack | Post Attack: Nifty Bottom | Recovery from Bottom (Nifty back at same level) | Nifty % drop to absolute bottom | Recovery days (from bottom to same level) | 12M Performance (%) | Performance vs MSCI EM 12M (%) |
|---|---|---|---|---|---|---|---|
| 13/12/01 | Attack on Indian Parliament | 27-Dec-01 | 7-Jan-02 | -7.6 | 11.0 | 7.7 | 2.0 |
| 7/11/06 | Mumbai train blasts | 8-Nov-06 | 10-Nov-06 | -0.2 | 2.0 | 73.9 | 18.4 |
| 26/11/08 | 26/11 Mumbai attacks | 3-Dec-08 | 4-Dec-08 | -4.7 | 8.0 | 93.2 | 6.8 |
| 2/1/16 | Pathankot airbase attack | 25-Feb-16 | 27-Apr-16 | -15.6 | 62.0 | 28.2 | -8.6 |
| 18/9/16 | Uri army base attack | 20-Sep-16 | 22-Sep-16 | -0.3 | 2.0 | 15.6 | -5.1 |
| 28/9/16 | Uri surgical strike - India's response | 29-Sep-16 | 4-Oct-16 | -1.9 | 5.0 | 13.3 | -4.3 |
| 14/2/19 | Pulwama attack | 19-Feb-19 | 21-Feb-19 | -1.7 | 2.0 | 14.3 | 5.8 |
| 26/2/19 | Balakot airstrike - India's response | 28-Feb-19 | 1-Mar-19 | -0.5 | 1.0 | 6.9 | 8.9 |
| 22/4/25 | Pahalgam attack | 27-Apr-25 | 28-Apr-25 | -0.8 | 1.0 | NA | NA |
| Mean | -3.7 | 10.4 | 28.4 | 3.0 |
Source: Bloomberg
Sectoral performance
Geopolitical tensions have varied impact on the sector considering the nature of respective events. Here is the breakdown. Long term performance (i.e. 12-month performance from the day of conflict) shows metals, energy and real estate have shown highest performance.
Long-term performance (post 12 months from the event of conflict)
| Sectors | Attack on the Indian Parliament | Mumbai train blasts | 26/11 Mumbai Attacks | Pathankot Airbase Attack | Uri Army Base Attack | Pulwama Attack | Mean |
|---|---|---|---|---|---|---|---|
| Nifty | 7.7 | 73.9 | 93.2 | 28.2 | 15.6 | 14.3 | 38.8 |
| Auto | NA | 0.3 | 226.6 | 36.7 | 10.2 | -4.8 | 53.7 |
| Banks | 50.8 | 58.8 | 121.4 | 54.2 | 25.8 | 15.6 | 54.4 |
| Energy | 60.7 | 83.3 | 76.9 | 47.8 | 38.3 | 4.5 | 51.9 |
| FMCG | -10.8 | -2.2 | 52.4 | 24.0 | 14.3 | 6.3 | 14.0 |
| Infrastructure | NA | 91.6 | 55.5 | 32.3 | 18.9 | 14.7 | 42.5 |
| IT | 13.2 | -8.3 | 135.3 | 2.8 | 2.2 | 3.3 | 24.8 |
| Metals | NA | 162.1 | 261.3 | 93.5 | 46.7 | 7.4 | 114.2 |
| Pharma | 7.8 | 5.8 | 65.8 | -5.5 | -20.7 | -2.0 | 8.5 |
Source: Bloomberg
Where markets stand in current conflicts?
The risk-off matrix of market performance during India-Pakistan conflict episodes provides a comprehensive view of market sensitivity to geopolitical tensions.
The matrix uses four key metrics—Nifty drawdown, VIX spike, G-Sec yield change, and FII equity flows—to assess the level of market stress. The 2025 India-Pak conflict registers the lowest risk-off rank, with only a 0.8% dip in Nifty post-attack, flat G-Sec yields, and strong FII inflows since 27th April-25 to 12th May-25, showing much less market volatility and an overall more resilient investor sentiment.
This trend suggests that the market’s sensitivity to such events has gradually decreased over time, with geopolitical risks being less disruptive to India’s equity market in recent years.
| Attack | VIX (peak % rise in VIX during the conflict) | India G-Sec Yield (max drawdown in bps) | Net FII Equity Flows (USD mn) | Risk Off Rank |
|---|---|---|---|---|
| Attack on Indian Parliament | NA | -11 | -133 | 4 |
| 26/11 Mumbai Attacks | 2 | -33 | -133 | 5 |
| Pathankot Airbase Attack | 82 | -32 | -2580 | 6 |
| Uri Army Base Attack | 2 | -6 | 309 | 2 |
| Pulwama Attack | 17 | 0 | -687 | 3 |
| Pahalgam Attack | 20 | 0 | 2213 | 1 |
Source: Bloomberg. Risk off ranking is based on drawdown and recovery during the event of conflict, peak VIX%, drawdown in G-sec yield, FII flows.
Impact on the economy
The ongoing conflict between India and Pakistan has severely impacted their bilateral trade, which was already on a downward trajectory.
As of CY24, direct trade between the two nations is valued at approximately $1.7 billion, with India’s exports accounting for $1.2 billion (representing only 0.3% of India’s total exports) and India’s imports from Pakistan around $0.5 million. The closure of the Attari-Wagah border—the primary land trade route—along with the suspension of trade activities, has led to an effective halt in direct commerce.
Insight for investors
While short-term volatility is always a possibility, historical trends indicate that India’s markets are well-equipped to withstand geopolitical tensions.
Sectors like metals, energy, and real estate have typically shown the highest gains during such periods. The ongoing geopolitical event with a neighboring country is unlikely to significantly impact the broader economy, given that Pakistan accounts for only 0.3% of India’s total exports.
Furthermore, the market’s drawdowns have been quickly recovered within just a few days, supported by uninterrupted FII inflows, signaling strong investor confidence amid the conflict.
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