War clouds over Dalal Street: Will FPIs pull back amid escalating India-Pakistan conflict?

Indian stock market today: Tensions between India and Pakistan escalated for the second consecutive day on Thursday, as the Indian Army reported on Friday that Pakistani armed forces had launched multiple attacks using drones and other munitions along the entire western border on the intervening night of May 8 and 9.

Pakistan made fresh attempts to strike military installations using drones and missiles—targeting areas including Jammu and Pathankot—were swiftly neutralised by Indian forces, following similar infiltration attempts at 15 locations across northern and western India.

This comes a day after India destroyed nine terror camps in Pakistan and Pakistan-occupied Kashmir (PoK). The Pakistani military claimed that India had conducted a series of drone strikes in Lahore, Karachi, and other locations.

The strike by India, coined Operation Sindoor, came two weeks after the Pahalgam terror attack in Jammu and Kashmir, in which 26 people, mostly tourists, were killed on 22 April.

Late Wednesday, India's Ministry of Information stated that its armed forces had “targeted air defense radars and systems at a number of locations in Pakistan,” adding that “it has been reliably learned that an air defense system in Lahore has been neutralized.”

India-Pakistan standoff sparks concern over FPI continuity

Amid escalating tensions between the two neighboring countries, the Indian stock market has shown limited downside. Although benchmark indices opened Friday’s trading session with sharp cuts, they swiftly recovered within the first hour of trade.

In contrast, Pakistan's stock exchange has witnessed a continuous decline, prompting authorities to suspend trading activity as the indices repeatedly hit lower circuit limits. While the Indian equity market has experienced relatively limited damage, the Indian Rupee has come under significant pressure.

The local currency witnessed its worst session in over two years on Thursday, coming under intense pressure, closing 89 paise lower at 85.72 against the US dollar. This significant depreciation of over 1 per cent marks the rupee's worst day since February 6, 2023. The rupee had closed at 84.83 against the greenback on Wednesday.

This has raised concerns among analysts that the sharp decline in the rupee could dampen foreign investor sentiment, just as overseas investors have recently turned bullish on the Indian stock market.

Prashanth Tapse, Senior VP (Research) at Mehta Equities Ltd, said, “There is a lot of caution in the markets, as investors fear that the ongoing tension—if it escalates into a major conflict between the two nuclear-powered nations—could trigger a significant sell-off in equities.”

"With the local currency depreciating sharply amid the ongoing standoff, foreign investors may exit domestic equities in favour of overseas safe-haven assets," he added.

FPI sentiment holds steady so far

Despite heightened geopolitical tensions, overseas investor sentiment remains resilient, as they continued their buying spree for the 16th consecutive trading session on Thursday, injecting nearly ₹48,533 crore into the Indian stock market.

After largely remaining sellers in the months following Indian benchmarks hitting record highs in September, foreign investors are making a comeback. Their renewed interest stems from optimism that India’s domestically driven economy will better withstand the global trade slowdown compared to its peers.

Following October 2024, global funds had significantly pulled out from Indian equities. However, strong support from domestic investors and sustained institutional buying helped markets rebound in March, with that momentum extending into April.

Markets to remain volatile in the near term, say experts

Shrikant Chouhan, Head of Equity Research, said, "Heightened border tensions and weak global cues dragged down markets and the rupee. Investors are advised to stay cautious, avoid aggressive positions, and focus on fundamentally strong stocks with limited near-term exposure to geopolitical risks. Defensive sectors and quality large caps may offer better stability in the current environment."

Trump said the US would need an “enormous” amount of time for deals with Japan and South Korea. He also added that “a lot of work” would be needed for an India pact, which proves that Indians are really tough in terms of negotiating deals.

"If the Nifty 50 breaks below 24200, we may see an increase in weakness throughout the day, potentially leading to a retest of levels 23900 or 23850, which were tested nine days ago. For a bullish market, it is essential to maintain levels above 23800 on a closing basis; otherwise, the likelihood of a drop to 23500 increases significantly," he further added.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.