It’s true that the market has always bounced back after such attacks in the past. During the train bombings in Mumbai in July 2006, the Sensex rallied the next day and the bull run continued unabated. Likewise, the bombings in south Mumbai in 2003 had little impact on the market, with the Sensex rising sharply soon after. More recent terrorist strikes in New Delhi, Bangalore, Hyderabad and Ahmedabad have had no effect. Nor did the attack on Parliament in December 2001 unnerve the markets. And even more importantly, on 12 March 1993, after a series of bomb blasts in the city, trading came to a standstill, but when the markets reopened for trading after the weekend on Monday, the Sensex rose by 2.48%. Recall that those blasts targeted, among others, the Bombay Stock Exchange (BSE) and three big hotels.

But Wednesday’s assault is very different, not only in its choice of targets but also in its audacity. This time, the rules of the game may have changed; the impact on the markets and on investment may be greater.

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One reason may be the timing. The Indian market has been reeling from the effects of the global credit crisis and the attack comes at a time when risk appetite is already very low. Second, this is the time of year when investors hold conferences and meet companies in order to firm up allocations for the next year. As an investment banker put it, “When an investor has spent the night trapped on the window ledge of his hotel, his view of India undergoes a marked change." An analyst with a foreign bank who did not want to be identified said that in order to avoid retrenchment, they had been busy telling their head office how stable India was as a country. That perception, he said, is bound to change. He also said that a client with a very large interest in India was also caught up in the fighting at one of the hotels. The point is that it is very likely that there were several such people, opinion-makers in the investing community abroad, who had been trapped in the south Mumbai hotels. Their experience is bound to affect their investment decisions, at least in the short term. Amitabh Chakraborty, president, equities, Religare Securities, believes that the attack will definitely hurt next year’s equity allocation to the Indian market and the country’s image as an equity destination. Nikhilesh Bhattacharyya, associate economist, Moody’s, writes: “The timing of the current blasts may be more unfortunate than in the past, with Indian banks facing major liquidity problems and the Reserve Bank of India struggling to defend the ailing rupee and stabilize credit markets. This means that capital outflows will have a greater impact than they did in the past, though history suggests that any reaction to terrorist attacks in Mumbai will only be temporary." Most market players were of the opinion that the markets should have remained open on Thursday, if only to send a message to the terrorists. With both BSE and the National Stock Exchange having all-India operations, there was no need to shut down the exchanges. The initial reaction has been negative, with the SGX Nifty closing down 2.3%.

That is, however, well above the lows of the day. Some analysts say that while there may be a short-term impact, terrorism usually has very few long-term effects on an economy. Any sharp fall on account of Wednesday’s attack, consequently, could see some bottom-fishing.

What has been the long-term impact of terrorism on investment? One obvious impact is on the costs of security, which are bound to rise significantly. The International Monetary Fund has estimated that the loss of US output from terrorism-related costs could be as high as 0.75% of gross domestic product. An Asian Development Bank study titled “The Impact of Terrorism and Conflicts on Growth in Asia 1970-2004" published in July by Khusrav Gaibulloev and Todd Sandler, says: “Terrorism also hinders growth by raising the cost of doing business in terms of higher wages, larger insurance premiums, and greater security expenditures. These higher costs result in reduced profits and, thus, smaller returns on investment." But much depends on whether the lure of profiting from the country’s growth will outweigh the fear of terrorism.

Nevertheless, it’s important to have a sense of proportion. The lack of credit, the piling up of goods in ports and the cancellation of expansion projects will have a far larger impact on the economy and the markets than the terrorist attacks. Similarly, continued deleveraging will have a much bigger impact on the market than Wednesday’s strike. Moreover, it’s not just a question of investment: As HDFC Bank chief economist Abheek Barua pointed out, the impunity with which the terrorists are striking makes this a governance question. Simply put, if ordinary people cannot be assured of their security, economic growth is bound to suffer.

Graphics by Paras Jain / Mint