If India and Pakistan Go to War in 2025

Rising Geopolitical Tensions: What’s Happening ?

With tensions between India and Pakistan rising once again following a deadly attack in Kashmir that claimed 26 civilian lives, fears of a military escalation are gripping both the geopolitical and financial landscape. While oƯicial responses have been measured so far, markets are already reacting. Historically, such episodes have triggered short-term volatility across asset classes. The big question now is—how bad could it get, and how long could it last ?

How the Market Is Reacting So Far

In the immediate aftermath of the news, Indian equity markets slipped. The Nifty dropped by 0.73%, and the Sensex fell 0.67% in early trade. The impact was more severe in broader indices, with the small-cap index down by 2.6% and mid-caps falling over 2.1%. The rupee weakened to ₹85.65 per dollar, nearing its all-time low, and foreign institutional investors (FIIs) paused inflows, waiting for clarity on how events unfold.

All 13 sectoral indices under NSE ended in the red, signaling a broad-based sense of caution across industries. This immediate reaction reflects market anxiety, though not necessarily a judgment on India’s long-term fundamentals.

What History Tells Us

India and Pakistan have seen open conflicts in 1947, 1965, 1971, and 1999. Each time, financial markets experienced an initial dip but often recovered within weeks or months. For example, during the 2019 Pulwama-Balakot standoƯ, the Nifty 50 initially fell over 2% but regained momentum within a fortnight. Markets hate uncertainty, not patriotism, and military escalations usually lead to short-lived corrections unless accompanied by lasting economic damage.

How China Economically Benefits from India-Pakistan Tensions

When tensions rise between India and Pakistan, China stands to gain economically. Both countries face significant economic setbacks during conflicts, but China manages to turn this instability into an advantage. India shifts its focus towards military spending, which slows down economic growth and deters foreign direct investment (FDI). During these times, China strengthens its position as global investors turn to China as a more stable alternative. China also leverages initiatives like the Belt and Road Initiative (BRI) and the China-Pakistan Economic Corridor (CPEC) to deepen economic ties with South and Central Asian nations, further enhancing its strategic and economic benefits.

Another major benefit for China is the growth in its manufacturing and technology sectors. As India focuses on defense, Chinese-made products gain a larger market share, especially in neighboring regions. Additionally, China’s regional partnerships grow stronger. With rising tensions between India and Pakistan, China emerges as an economic powerhouse, enhancing its global influence. This process not only boosts China’s economic growth but also solidifies its global influence, allowing China to quietly capitalize on the regional instability.

Historical Market Reactions to Military Conflicts

Nifty & Sensex : What to Expect

Sectoral Analysis : Who Gains, Who Loses

Potential Gainers

• Defense & Strategic Manufacturing : Heightened geopolitical risk increases defense budgets and arms procurement. Stocks like BEL, HAL, and Bharat Forge could benefit from orders and investor interest.

• Gold & Safe-Haven Assets : During uncertainty, investors often turn to gold. Indian gold ETFs such as Nippon Gold BeES and companies like Titan (jewelry) may see buying interest. Sovereign Gold Bonds could also gain traction.

• Oil Marketing Companies (OMCs) : Volatile crude prices and fuel hoarding behaviors may boost OMC margins. Watch IOCL, BPCL, and HPCL.

Likely Underperformers

• Banking & Financial Services : Conflict clouds business confidence and credit demand. Risks of NPAs rise. Leading banks like HDFC Bank and ICICI Bank could see muted performance in the short term.

• Aviation & Tourism: Air traffic tends to fall, especially near border regions. Airlines like Indigo, rail-tourism firms like IRCTC, and travel aggregators like MakeMyTrip may feel the heat.

• Automobiles : Disruptions in logistics and a cautious consumer mood can affect auto sales. Stocks like Maruti Suzuki and Tata Motors may face selling pressure.

Stable/Resilient Sectors

• Pharmaceuticals : As export-driven businesses, pharma firms like Sun Pharma and Cipla tend to be insulated from domestic shocks.

• IT Services : Global clients and dollar revenues make companies like Infosys and TCS relatively stable in times of local conflict.

• Agri & Inputs : Rural-driven companies like UPL and Coromandel are less exposed to urban or border tensions.

What the Experts Are Saying

Top market voices are calling for calm, not capitulation.

“Market reaction reflects uncertainty, not weakness in fundamentals.”

Manish Bhargava, Straits Investment Management.

“Bond yields could rise above 6.30% as global investors shift to safe assets.”

Alok Sharma, Head of Treasury, ICBC India

“Markets recover unless war leads to prolonged disruptions.”

Motilal Oswal, Post-Pulwama Market Note

“Correction likely short-lived unless economic activity is hit.”

Kotak Institutional Equities

Where Are the Indices Headed ?

If a limited military conflict does occur, historical patterns suggest a potential correction of 5–10% in Nifty and Sensex in the near term. Currency pressures could push the rupee toward ₹86–88 against the dollar. Bond yields might inch up as demand for risk-free assets rises. However, without economic shutdowns or prolonged instability, a rebound is likely within one to three months, especially if global liquidity remains supportive.

Investor Takeaway: Don't Panic, Prepare

Geopolitical risks are part of investing in emerging markets. But panic-selling in response to fear often leads to missed opportunities. Long-term investors should focus on.

• Staying diversified

• Maintaining exposure to resilient sectors

• Hedging via gold or international funds

• Avoiding impulsive exits based on headlines

Final Thought

“Fear makes you sell. History tells you to hold.” As always, fundamentals, not fear, should guide your investment decisions. India’s markets have weathered worse storms and emerged stronger. Stay cautious, but stay invested.