Pahalgam Fallout: Markets Volatile, But History Shows Swift Recovery After Tensions

The Indian stock market has shown signs of weakness following the Pahalgam terrorist attack, with analysts and investors turning cautious. However, history suggests that while geopolitical tensions do cause short-term jitters, Indian markets have typically recovered swiftly after such incidents.

Independent research analyst Amreesh Baliga shared that conversations with several HNIs (High Net-Worth Individuals) reveal growing apprehension, which has led to significant selling pressure. This selling, despite continued foreign institutional investor (FII) buying, partly explains the market declines over the past two sessions.

Baliga believes a correction is possible, but a sharp fall is unlikely unless geopolitical risks escalate further. The sentiment reflects a cautious but not overly bearish outlook.

Independent analyst Ajay Bagga noted that a sharp, short-term correction could happen if there is “kinetic action” following the Pahalgam incident. However, he stressed that limiting hostilities to a contained response will be crucial to avoid deeper market impacts. According to Bagga, markets are likely to stay on edge for the next couple of weeks as investors monitor developments closely.

Looking back, market behavior in response to past Indo-Pak tensions provides some reassurance.
During the Pulwama terror attack in 2019, when India conducted airstrikes in Balakot, the Sensex fell 239 points initially, but markets bounced back quickly the next day. The immediate reaction was mild, with the benchmark indices dropping just 0.2 percent on February 15.

Similarly, during the 2016 Uri attack, the Sensex dropped over 400 points following India’s surgical strikes. However, the markets recovered in the following sessions.

Even the devastating 26/11 Mumbai attacks in 2008 did not derail the markets. Surprisingly, the Sensex gained nearly 400 points over two trading sessions during the attack period, while the Nifty advanced 100 points.

Going even further back, during the 1999 Kargil conflict, both Sensex and Nifty gained around 33 percent over the three-month war period. The Sensex surged by 1,115 points and the Nifty climbed by 319 points, showing remarkable resilience.

Experts like Deepak Jasani highlight that the current market behavior is consistent with historical trends during times of geopolitical stress. Typically, domestic investors react with heightened panic, leading to initial declines, while foreign investors continue to buy, stabilizing the market later.

However, this time, analysts caution that until there is clarity on India’s response to the Pahalgam attack, markets may remain cautious and volatile. Adding to the uncertainty, the Q4 FY25 earnings season has been uninspiring, with most companies either meeting or slightly missing expectations, offering no significant positive surprises.

The key uncertainty now lies in whether the situation will remain localized or escalate further. Until then, many investors, especially HNIs, are expected to tread carefully.