As tensions between India and Pakistan escalate, both nations' stock markets are feeling the heat, with significant declines reported in Pakistan following military operations initiated by India. On May 8, 2025, the benchmark KSE-100 Index of the Pakistan Stock Exchange plunged over 7%, marking a tumultuous day for investors amid fears of further conflict.
Trading on the Pakistan Stock Exchange was halted for an hour on Thursday after the KSE-100 Index dropped 6,948.73 points, or 6.32%, to settle at 103,060.30. This steep decline came just a day after India's Operation Sindoor, which targeted nine terror sites in Pakistan and Pakistan-occupied Kashmir in retaliation for a deadly attack in Pahalgam that claimed the lives of 26 civilians.
Analysts noted that the market's volatility was exacerbated by reports of loud explosions heard in major cities like Karachi and Lahore, raising concerns about the potential for an escalation in military actions. The KSE-100 had already experienced a sharp drop, losing over 6% of its value the previous day, which was one of the worst single-day declines since 2008.
On May 7, 2025, India launched its precision military strike, Operation Sindoor, targeting locations linked to terrorism. The operation was a direct response to the Pahalgam attack, which was one of the most severe terror incidents in India since the 2019 Pulwama bombing. Following the military actions, the Pakistan military reported that they shot down 12 Indian drones that had violated their airspace.
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, commented, "Uncertainty regarding the extent of an expected face-saving response from Pakistan to India’s Operation Sindoor will weigh on markets. From the market perspective, it is important that the conflict should not escalate." This sentiment echoed throughout the investment community as traders braced for potential fallout.
In contrast, the Indian stock market showed resilience amidst the turmoil. On the same day, May 8, 2025, the benchmark Sensex in India was trading slightly lower, down around 138 points, but analysts remained optimistic about the medium-term outlook for the Indian economy. Radhika Rao, Senior Economist at DBS Bank, stated, "While sentiment may be jittery in the immediate term, these tensions are unlikely to derail the medium-term appeal of the Indian economy."
Despite the ongoing conflict, India has been actively pursuing trade agreements to bolster its economic position. On May 6, 2025, India successfully sealed a long-negotiated trade agreement with the UK, and discussions are ongoing for a bilateral pact with the US. Analysts believe that these developments could significantly shape India's growth trajectory, even in the face of geopolitical tensions.
On the other hand, Pakistan's economy is already fragile, and the recent military escalations have raised fears of a deeper financial crisis. The KSE-100 had previously risen over 86% in 2024, marking one of its strongest performances in years. However, the recent sell-off has erased a significant portion of those gains, with the market losing 4.1% over the last nine sessions due to fears of cross-border conflict.
As the situation unfolds, investors are left in a state of cautious optimism, hoping for a quick resolution to the escalating tensions. Shahbaz Ashraf, Chief Investment Officer at Frim Ventures, expressed a sense of hope, stating that investors are cautiously optimistic that the conflict will remain short-lived, with likely mediation from global powers.
In summary, the situation remains fluid, with both nations' markets reacting to the geopolitical landscape. While the immediate outlook appears grim for Pakistan's stock market, India is looking to leverage its economic agreements to maintain stability. As both countries navigate this challenging period, the eyes of the financial world remain closely trained on developments that could shape the future of South Asian markets.
