The roaring comeback of foreign institutional investors sees a threat of hitting a standstill as border tensions between India and Pakistan flare up, sparking fears of a broader conflict.
The heating geopolitical environment between the two neighbouring countries puts the relentless FII buying for 16 straight sessions, which saw inflows worth Rs 50,000 crore come under risk. If situation at the border worsens, FIIs may be forced to backtrack and pull out money from Indian equities, casting shadows on the strong market run.
These concerns gathered momentum after Pakistan launched drone strikes across Jammu and Kashmir and reported targeting of military installations in Punjab, Rajasthan, and Gujarat late night between May 8-9. Pakistan’s offensive was met with India’s military retaliation, sparking concerns of a broader conflict between the two nuclear-armed neighbours.
The impact was immediately visible across financial markets. The India VIX, the benchmark for gauging market volatility surged another 6% on Friday to cross 22, following a 10% spike in the previous session. While Indian equity indices like the Nifty and Sensex have remained relatively stable given the circumstances, they still logged losses of around 1% in early trade, suggesting mounting investor unease.
The forex market had a similar story to tell as the Indian rupee took a sharp hit this week, marking a turn from its recent appreciation. On Thursday, the local currency registered its steepest single-day fall in over two and a half years, sliding 81 paise to close at 85.58 against the US dollar. The weakness seeped into Friday as well, with the currency dipping a further 30 paise in early trade to 85.88.
"When geopolitical tensions rise, the financial markets tend to react negatively due to increased uncertainty, risk aversion, and the potential for economic disruptions. The equity markets in India till now have been uncharacteristically calm and resilient,” said Prasanna Pathak, Managing Partner, The Wealth Company.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, echoed that view. He credited recent FII inflows for supporting market sentiment but warned that further escalation at the border could jeopardise that trend. “A worsening conflict could derail India’s fiscal consolidation path and weaken investor confidence,” he said.
Having said that, Vijayakumar also offered a cautiously optimistic stance on the market, stating that its resilience was banked on the demonstration of India’s clear superiority in conventional warfare, and fears that further escalation of the conflict will inflict huge damage to Pakistan.
In addition, he also pointed towards supportive global and domestic macros, including a weaker dollar and potentially faltering US and Chinese economies as tailwinds for the Indian market.
The domestic macros construct is further rendered stronger by the high GDP growth expected this year and the declining interest rate environment. These are the reasons why FIIs have been on a buying spree in the Indian market during the last sixteen trading sessions, betting on India’s strong structural growth story, Vijayakmar said.
Meanwhile, analysts across Dalal Street are suggesting investors to take on a more measured approach in the current market construct. They recommend investors not to panic sell their holdings, but rather wait and watch for the dust to settle.
