Indo Pak Clashes: Keep it short and de-escalate say global investors

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Three nights of hostilities from 06 to 09 May on the India Pakistan Line of Control and the International Border is leading to some concerns in financial circles. One metrics the Indian stock markets are seen to be one of the most resilient having seen cycles of violence in the past are showing a degree of nervous ness. The other is travel and tourism which has seen an immediate impact with cancellation of bookings amidst closure of a host of airports in Northern India, but there could be more concerns in case the skirmishes are protracted.

Here is a deeper look why-

The night of May 06/07 saw Indian armed forces launching air and missile raids through standoff weapon systems across the LoC and International Broder and neutralise terrorist hubs and their staging points. Pakistan responded the next night with an attempt to penetrate the Indian skies which was effectively checked on May 07/08. These attacks were launched across the Western sector of the India Pakistan border extending from Kashmir to Gujarat indicating horizontal escalation.

On 08 May India launched a series of drone attacks destroying Pakistan air defence radars in Lahore and another attack symbolically close to the Pakistan Army GHQ Rawalpindi. In response Pakistan on the night 08/09 May attempted drone attacks in Jammu and Kashmir and Rajasthan including Jammu and Udhampur.

The drone and missile skirmishes continued

“Operation Sindoor is fully under way. Pakistan army chief Asim Munir will not be given a face-saving exit,” a senior army officer was quoted by the Times of India in a live update on May 09.

It is not clear when the two sides, who have been under immense pressure from the international community with the US Secretary of State Marco Rubio calling up the Indian and Pakistan ministers for calming down tensions, will break the cycle of escalation.

On the other hand, a stray mishap could be a Black Swan event sparking major escalation.

International investors and bankers are watching this situation and the first to react is obviously are domestic stocks with wide fluctuations as the Bombay Stock Exchange BSE Sensex is reported to have crashed 800 points in the first session on May 09.

Apart from a protracted Indo Pakistan conflict, there are multiple global factors, prices of crude, rise in the US dollar rates and delays in India-US trade deal talks seen to be behind this phenomenon. The US could now possibly use the leverage of the trade deal to coerce India to cessation of hostilities despite the convivial relations between the top leaders. This could be a setback in settling the tariff issue quickly.

The popular notion is that a bankrupt Pakistan will not be able to afford a long war with India. Indeed India has the financial heft to sustain a conflict far more than its western adversary.

However, the longterm interest of investors who were looking at India as a safe destination for investments may review the same despite the positives of the India UK trade deal which was timedinked a day before Operation Sindoor.

While conduct of the civil defence drills in several states on May 07 was seen as a prudent measures from the point of security and safety of the critical installations, this also send a signal of India preparing for a protracted war.

A report in the Reuters for instance states, that this could impact India as a destination for Global Capability Centres (GCC) or Centres of Excellence [COE] essentially back offices for research and allied operations which are seen to be highly cost effective

R. Sree Ram writing in Money Control on May 08 also highlights that a deeper conflict with Pakistan will make foreign investors wary quoting analysts at Jefferies. “The base case remains a limited military retaliation by India, with a very low probability attached to a larger escalation,” he quotes analysts at Jefferies.

All eyes are thus on an intense but short conflict.