Markets on Edge as India Launches Strikes Under ‘OPERATION SINDOOR’, Fed Meet in Focus

The Indian equity market is expected to open on a cautious footing on May 7 as investors react to India's targeted attack on terrorist bases in Pakistan and Pakistan Occupied Kashmir.

The Indian Armed Forces launched ‘OPERATION SINDOOR’ in the early hours of the day and hit nine terrorist-linked sites in Pakistan and Pakistan-occupied Jammu and Kashmir. The action was in response to the April 22 terrorist attack that struck Pahalgam killing 25 Indian and one Nepali citizen.

In a knee-jerk reaction to the news, the GIFT Nifty tumbled over 100 points earlier today, as uncertainty over the worsening situation between the two nuclear-armed nations deepened. The fall in the GIFT Nifty futures point towards heightened investor concern over near-term geopolitical uncertainty, especially after Pakistan vowed for retaliation. However, GIFT Nifty soon managed to recover its early losses and was now trading 0.5% higher.

The benchmark indices, Nifty 50 and BSE Sensex closed 0.3% and 0.2% lower, respectively, on Tuesday. The headline 50-stock index has climbed 0.8% since the Pahalgam incident.

Although the headline indices brushed off the impact of the April 22 attack, today might be a different day for the market as early indicators signal a cautious reaction to the operation.

“Our actions have been focused, measured and non-escalatory in nature,” the Ministry of Defence said in a press release. “India has demonstrated considerable restraint in selection of targets and method of execution.”

Alongside the growing tensions between India and Pakistan, investors are also likely to remain on edge in the run-up to the outcome of the US Federal Reserve's meeting, due later today.

While the US central bank is expected to keep the interest rates unchanged, Jerome Powell's comments of inflation and growth amid tariff-related uncertainties will guide the near-term market sentiment. Apart from this, ongoing March quarter earnings season will also trigger stock specific moves, meaning that volatility is likely to remain high.

Textile, apparel, and alcohol beverages companies will also be under focus after the UK-India Free Trade Agreement. 

Historical Trends

Historical data over the past two decades suggests that stock markets often recover quickly, or are even remain unaffected by such incidents over the longer term. Nifty 50 has largely remained resilient during India-Pakistan tensions. It was only after the 2001 parliament attack when the market saw a correction to the tune of nearly 14%, according to the data analysed by Anand Rathi Research.

Except the 2001 attack, the Indian equities has not seen major corrections during the past episodes like the Kargil War, Uri attack, and Balakot airstrike, which led to only minor corrections of 1–2%.  

Even if tensions escalate, analysts expect the Nifty to correct no more than 5–10%, and any dip will likely be short-lived. The key uncertainty this time is whether the situation remains localised, or escalates further. Unlike global wars and conflicts that tend to hurt the overall supply chain, market reaction to India-Pakistan is short-lived.