Missiles for Markets: Indian Investors Stay Calm Amid Conflict

By Garvita Yadav

On May 7, 2025, India launched Operation Sindoor, a targeted military strike against Pakistan following a terrorist attack that killed 26 people, including a foreign tourist in Pahalgam. Such news should have triggered shockwaves through financial markets with every stock crashing, except perhaps, defence. Investors should have fled.

Instead, something unsuspecting happened: almost nothing. The diplomatic fallout triggered a 1% dip in the Nifty50 and Sensex on May 7. However, by May 8, markets opened in the green—Nifty crossed 24,400, Sensex 80,800. Defense stocks did soar 15%, but the broader market absorbed the shock with startling composure. Nifty50 and Sensex quickly recovered and many investors seemed to treat this military action like just another Wednesday.

This represents a fundamental shift in market behavior. India's financial markets have evolved from reactive to absorptive, processing geopolitical shocks and emerging stronger. Operation Sindoor vindicated this shift—investors now treat such episodes as calculated opportunities rather than mere risks.

For decades, conflict meant market chaos. Border skirmishes triggered immediate risk premium spikes across asset classes, capital flight, currency devaluation, and bond yield expansion. However, India's markets have quietly undergone a transformation that signals not just economic maturity, but a seismic shift in how global capital views the subcontinent.

The numbers tell a startling story. According to Anand Rathi's analysis of ten major geopolitical incidents, Indian markets averaged just a 7.5% correction, with a median drop of only 3.5%. Post the Kargil War—actual war, not just strikes—the Sensex gained 1.6%. In the Uri and Balakot attacks, market drops were 1.2% and 0.8% respectively. In nine out of ten cases, foreign portfolio investment flows remained steady. Most significantly, Indian equities outperformed the S&P 500 by an average of 21.1% during these geopolitical episodes. Declines were driven more by sentiment than economic fundamentals, but today, even the sentiment is changing.

This isn't about military might—it's about economic gravity. India's economy is nearly ten times larger than Pakistan. India's domestic consumption, which accounts for over 60% of GDP, operates largely independent of border tensions. Key sectors like IT services, manufacturing, and banking maintain operational continuity even during military episodes. This sectoral resilience limits volatility transmission and underpins confidence in Indian markets.

Perhaps the most striking indicator of this new reality is FII behavior. Despite initial 2025 outflows exceeding ₹96,000 crore through March, April and May witnessed a marked reversal, with approximately ₹20,000 crore in fresh inflows while border tensions peaked. This reflects a new sophistication in risk assessment by international institutional investors who have learned to distinguish between geopolitical theater and genuine economic threats. Global capital increasingly treats Indo-Pak tensions as containing regional issues rather than systemic risks requiring portfolio adjustment.

The bond markets tell an even more powerful story. The Reserve Bank of India has cut the repo rate by 50 basis points this year to 6.0% and has injected $100 billion in liquidity since December. This reflects a clear pivot in stance to a growth-oriented, accommodative policy and signals that inflation is well anchored. It has fueled a strong bond market rally, with yields declining and 10-year government bond yields falling to approximately 6.2%. This narrowing spread with U.S. Treasury yields to a two-decade low indicates that bond markets view Indian sovereign risk as fundamentally stable, even during active military operations.

A comparison with US bond yields reveals a telling conclusion: internal disruptions are greater confidence busters than external skirmishes. U.S. Treasury yields have surged in 2025, with the 10-year note hitting 4.41% and the 30-year bond nearing 4.92%. This spike stems from investor fears over disruptive economic policies, particularly a $4 trillion tax cut extension, which risks worsening the U.S. deficit—now surpassing $36 trillion. Moody's recent downgrade of U.S. credit from AAA to Aa1 highlights growing fiscal concerns. Notably, these pressures come despite no new external wars, in fact, recent trade relaxations with major economies have eased tariff tensions. This reveals that U.S. markets are now more rattled by internal instability than external conflicts.

What we're witnessing is the emergence of India as a "safe haven with growth", a combination that typically doesn't exist in emerging markets. The achievement of what economists’ term "conflict immunity"—the capacity to pursue strategic military objectives without material economic consequences—marks a significant milestone in financial market development.

It's important to acknowledge the parameters of this resilience. Full-scale war would fundamentally alter market dynamics and risk assessment. However, the current pattern of targeted conflicts with economically constrained adversary has created a predictable framework that markets can efficiently price. In an increasingly volatile global environment, this combination represents exceptional investment attractiveness.

To conclude, India's financial markets have sent a clear message of evolution to the world. In an era characterized by geopolitical volatility affecting global markets, India has established operational continuity that transcends traditional emerging market constraints. The ability to compartmentalize regional conflicts from broader economic performance through consistency in internal policies represents a significant achievement in market development.

This isn't just market maturity—it's market evolution. For global capital seeking growth opportunities without traditional emerging market volatility, India isn't just an option anymore. It's the obvious choice.

 Garvita is a final-year BSc student in Economics and Finance with a Minor in Marketing at Ashoka University. Her passion lies at the intersection of financial analysis, economic reasoning, and marketing strategy. She has built a strong academic foundation in these areas, complemented by hands-on experience in market research and pre-sales support.

She is particularly drawn to cross-functional roles that combine financial storytelling, deal making, and client engagement. Garvita is eager to contribute to high-impact teams that operate at the intersection of finance and business, where strategic thinking and clear communication can drive meaningful outcomes.

She has previously been published in Hindustan Times