India’s Investment Outlook Holds Steady Despite Pakistan Conflict

Concerns have been raised that the recent escalation between India and Pakistan could shake foreign investment sentiment. However, analysts suggest the actual impact may be muted. India’s economy, now valued at USD 4 trillion, has minimal direct trade with Pakistan, limiting immediate financial exposure. In fact, despite cross-border missile strikes grabbing headlines, local equity, currency, and bond markets showed almost no reaction. Investors seem to be betting that the situation is unlikely to lead to a full-blown conflict. Considering this, Ajay Marwaha, head of fixed income of the Nuvama Group, said that the broader investment landscape might well remain unaffected.

Historical Resilience of Indian Markets

India's past tiffs with its neighbors offer some comfort. Take, for example, the 2019 India-Pakistan flare-up. After that kerfuffle, the rupee held its ground against the dollar, and yields on Indian bonds saw a very modest rise after which they promptly headed downward. Or consider the Galwan Valley clash with China in 2020. The rupee weakened a fraction after that incident, which was an intense fight, but quickly stabilized.

Domestic Strength Balances External Caution

The robust domestic market of India serves as a buffer from capital market volatility linked to global geopolitical events. Portfolio flows to India are only temporarily affected, even by major external developments like military conflicts or massive natural disasters.

On net, India has recently seen  substantial foreign investor participation in its domestic capital markets. By adding to their existing holdings in the domestic equity markets, foreign institutional investors increased their overall exposure to Indian equities to USD 889 billion as of May 2023. Despite a modest pullback in the Indian rupee in the first quarter of 2023, the local equities being held by these foreign investors delivered a currency-adjusted return of 12% from 2022 to early May 2023.

Focus on Trade Deals and Structural Reforms

India’s immediate conflict notwithstanding, its long-term investment appeal is rooted in trade and economic reforms that are going in the right direction. Just days ago, a milestone free trade agreement with the U.K. was finalized, and discussions with the U.S. for a bilateral pact are progressing nicely, with many suggesting for the global slowdown and trade dispute resolution to be seen as a great opportunity for India.

These two developments, along with India’s plans to lower tariffs on raw materials in order to encourage the kind of manufacturing that goes with a truly ‘Make In India’ reality, are pivotal for growth. And that makes the short-term jitters that are affecting the stock market a much lesser worry.