After flooding the Indian stock market with over Rs 50,000 crore worth of US dollars in just 16 trading sessions, foreign institutional investors (FIIs) could be forced into a tactical retreat as geopolitical temperature between India and Pakistan threatens to scorch the market’s recent gains.
On the intervening night of May 8–9, Pakistan’s armed forces launched coordinated drone and artillery strikes across the border, prompting the Indian Army to respond swiftly. "The attacks were effectively repulsed," the Army said on Friday morning, even as Pakistani troops reportedly carried out “numerous ceasefire violations” along the Line of Control in Jammu and Kashmir.
With that, India's geopolitical risk premium just shot up—and so did FII anxiety.
The markets are already showing signs of stress. The Indian rupee, which had been limping through global headwinds, tumbled sharply. On Thursday, it posted its steepest single-day fall in over two-and-a-half years, plunging 81 paise to close at 85.58 against the US dollar. The pain continued on Friday with another 30 paise drop to 85.88 in early trade.
"During any war-like scenario, investors usually flee toward safe-haven assets, causing capital outflows from the market and weakening the currency in the short-term," a forex trader said, capturing the growing sentiment on the Street.
Also read | Drone stocks rally up to 15% as high-tech sky assassins dominate India-Pakistan conflict
Foreign institutional investors (FIIs), who had been on a buying spree since April 15, pumping in a staggering Rs 50,400 crore into Indian equities, now face a thorny question: stay the course or make a U-turn?
Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, cautioned that while India's macroeconomic fundamentals remain strong, escalating conflict could reverse the momentum.
“If the Indo-Pak tensions escalate into an extended conflict, it will adversely impact FII inflows. It could also derail India’s fiscal consolidation efforts and limit the Monetary Policy Committee’s ability to cut interest rates,” he warned.
Also read | Every second FII dollar now chasing financial stocks: Should you join the stampede?
Still, he offered a note of cautious optimism: “Under normal circumstances, on a day like this, the market would have suffered deep cuts. But that’s unlikely now due to two reasons: first, the conflict has so far demonstrated India’s clear superiority in conventional warfare; and second, the market remains inherently resilient, supported by strong global and domestic macros.”
Indeed, India’s economy, buoyed by robust GDP growth and a favourable interest rate outlook, has been a magnet for foreign capital, especially amid dimming prospects in the US and China. However, this thesis is now facing a serious test.
Vikram Kasat, Head of Advisory at PL Capital, believes the fallout will likely be limited.
“India’s economy, having recently crossed the $4 trillion mark, has minimal direct trade with Pakistan. The cross-border missile strikes carried out by India had limited immediate impact on domestic equities, currencies, or bonds,” he said.
Still, he acknowledged investor anxiety. “Sentiments may remain jittery in the short term, but these tensions are unlikely to derail the medium-term appeal of the Indian economy. Most foreign investment in manufacturing is concentrated in southern and central India, far from the border areas in the north and west.”
Meanwhile, analysts are advising clients to tread cautiously. Leveraged and speculative positions should be pared down, and derivatives may be used to hedge near-term volatility. Defensive sectors and quality large-caps are being positioned as the safest bets in this uncertain environment.
The war drums may be distant, but their tremors are being felt on Dalal Street—evident from the Sensex plunging over 1,300 points intraday on Friday morning.
On the intervening night of May 8–9, Pakistan’s armed forces launched coordinated drone and artillery strikes across the border, prompting the Indian Army to respond swiftly. "The attacks were effectively repulsed," the Army said on Friday morning, even as Pakistani troops reportedly carried out “numerous ceasefire violations” along the Line of Control in Jammu and Kashmir.
With that, India's geopolitical risk premium just shot up—and so did FII anxiety.
The markets are already showing signs of stress. The Indian rupee, which had been limping through global headwinds, tumbled sharply. On Thursday, it posted its steepest single-day fall in over two-and-a-half years, plunging 81 paise to close at 85.58 against the US dollar. The pain continued on Friday with another 30 paise drop to 85.88 in early trade.
"During any war-like scenario, investors usually flee toward safe-haven assets, causing capital outflows from the market and weakening the currency in the short-term," a forex trader said, capturing the growing sentiment on the Street.
Also read | Drone stocks rally up to 15% as high-tech sky assassins dominate India-Pakistan conflict
Foreign institutional investors (FIIs), who had been on a buying spree since April 15, pumping in a staggering Rs 50,400 crore into Indian equities, now face a thorny question: stay the course or make a U-turn?
Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, cautioned that while India's macroeconomic fundamentals remain strong, escalating conflict could reverse the momentum.
“If the Indo-Pak tensions escalate into an extended conflict, it will adversely impact FII inflows. It could also derail India’s fiscal consolidation efforts and limit the Monetary Policy Committee’s ability to cut interest rates,” he warned.
Also read | Every second FII dollar now chasing financial stocks: Should you join the stampede?
Still, he offered a note of cautious optimism: “Under normal circumstances, on a day like this, the market would have suffered deep cuts. But that’s unlikely now due to two reasons: first, the conflict has so far demonstrated India’s clear superiority in conventional warfare; and second, the market remains inherently resilient, supported by strong global and domestic macros.”
Indeed, India’s economy, buoyed by robust GDP growth and a favourable interest rate outlook, has been a magnet for foreign capital, especially amid dimming prospects in the US and China. However, this thesis is now facing a serious test.
Vikram Kasat, Head of Advisory at PL Capital, believes the fallout will likely be limited.
“India’s economy, having recently crossed the $4 trillion mark, has minimal direct trade with Pakistan. The cross-border missile strikes carried out by India had limited immediate impact on domestic equities, currencies, or bonds,” he said.
Still, he acknowledged investor anxiety. “Sentiments may remain jittery in the short term, but these tensions are unlikely to derail the medium-term appeal of the Indian economy. Most foreign investment in manufacturing is concentrated in southern and central India, far from the border areas in the north and west.”
Meanwhile, analysts are advising clients to tread cautiously. Leveraged and speculative positions should be pared down, and derivatives may be used to hedge near-term volatility. Defensive sectors and quality large-caps are being positioned as the safest bets in this uncertain environment.
The war drums may be distant, but their tremors are being felt on Dalal Street—evident from the Sensex plunging over 1,300 points intraday on Friday morning.
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