India and Pakistan have agreed to a ceasefire ending several days of fighting that was the worst in decades between the nuclear-armed neighbors. Amidst the hostilities the valuation of India's stock market dropped, resulting in $83 billion of lost market value. The Rupee also weakened against the USD. However, India's markets and currency have been resilient when tensions have escalated in the past. Investor confidence does not appear to have been shaken by the tit-for-tat attacks.
India's economy has plenty of tailwind in its sails sufficient to withstand the increased geopolitical risk. According to the IMF's April 2025 World Economic Outlook, India will replace Japan as the world's fourth-largest economy this year (having just displaced the UK to become the fifth largest economy in 2022). Corporations increasingly view India as a safe haven from US-China trade tensions and technology rivalry. Indeed, tech firms have rapidly been shifting smart phone manufacturing from China to India to avoid tariffs. Foreign corporations also plan to invest billions into India's data centers and digital infrastructure.
The US and EU have ongoing trade talks with India, while the UK just announced a trade deal with the “new economic superpower” that it says will increase bilateral trade by £2.2 billion annually. Under the deal, 85% of British goods would face no tariffs in India within a decade, while 99% of Indian exports to the UK would be duty-free. However, not everyone is happy with some aspects of the deal. The Law Society of England and Wales welcomed the trade deal but noted its disappointment that legal services had not been included. Law Society president Richard Atkinson said, “This is a missed opportunity for a significant breakthrough in terms of market access for lawyers in both India and the UK.”
Notwithstanding prior resilience by investors, it is still uncertain what will happen if hostilities begin to impact business operations. India has closed 32 airports in the northern and western areas of the country, while the US, UK and other embassies issued warnings against travel near the border with Pakistan. For the foreseeable future, Modi's government will need to carefully balance national security with economic development.
Equity indices are poised for a relief rally Monday after the weekend announcement of a "pause" in hostilities with Pakistan, although the breather could well be short-lived if the situation along the border were to worsen yet again.
