India Soars as Pakistan Stumbles: A Tale of Two Stock Markets

In the wake of the recent Pahalgam terror attack and heightened tensions between India and Pakistan, Indian stock markets have shown the most amazing resilience. The Nifty 50 and BSE Sensex have not only withstood the geopolitical storm but have managed to post gains. This is a very good sign for investor confidence. Even on May 7, when Indian forces executed Operation Sindoor targeting terrorist hubs across Pakistan and Pakistan-occupied Kashmir, Indian indices closed in positive territory. Such performance over the last month really underscores the depth of India's Economic strength.

Pakistan’s KSE 100 Plummets Under Pressure

By contrast, the Karachi Stock Exchange in Pakistan has suffered investor jitters. Since cross-border hostilities between India and Pakistan have picked up, going back to April 22, the KSE 100 index has tumbled over 6 percent. On the day of Operation Sindoor alone, it was down more than 5 percent during trading before recovering some losses to close the day only 3 percent lower than the previous day. Not only does the index reflect fears over events in Pakistan and the possible escalation of tensions with India, it also once again calls attention to the KSE's own chronic problems. Since the KSE essentially closed after the results were announced from the election in early May, it has now only opened twice; given the current environment, it's possible that international investors may have the KSE on a watch list for heightened risk.

Historical Trends Reinforce India’s Stability

Historical events have shown that the Indian markets have been resilient when confronted with issues of a geopolitical nature. Research done by Anand Rathi and Bajaj Broking reveals that during past confrontations, like the Kargil conflict or the Balakot air strike, Indian indices only fell back marginally. And those pullbacks were largely attributed to factors affecting the global markets, with the Indian market being part of that global ecosystem.

Diverging Economic Fundamentals Shape Market Sentiment

The starkly different market reactions arise from very different kinds of economic health. India, the world’s fifth-largest economy and on track to soon surpass Japan, enjoys rapid growth, sustained public investment, and healthy domestic consumption. By contrast, Pakistan suffers from really poor economic health, as suggested by weak key indicators: high inflation, currency volatility, and a dependency on IMF bailouts.

Moody’s recently said that prolonged tensions would likely derail Pakistan’s modest recovery, putting fiscal consolidation at risk and access to foreign financing in jeopardy. But India’s macroeconomic stability, notwithstanding significant geopolitical headwinds, looks pretty much as it has always looked, and is bolstered by recent foreign institutional investment of the kind that hasn’t been seen since 2021.

The emerging market story is a well-worn one. When investors get nervous, they seek the shelter of economic strength. And what demonstrates the most economic strength is the fundamentals.