As tensions escalated between India and Pakistan, domestic individual investors who had invested in Indian stocks began selling off. Although the Indian stock index has been holding steady, it appears they believe that weakness is inevitable if the conflict becomes prolonged.
According to financial information provider FnGuide on the 8th, the total assets of 40 Indian equity funds with assets exceeding 1 billion won decreased by 200 million won compared to the previous day. While this is minimal compared to the total assets of 1.842 trillion won in Indian equity funds, it marks the first time since the terrorist attack by Islamic militants in Pahalgam, Indian-administered Kashmir, on the 22nd of last month that funds have exited the market.
On the previous day, the Indian government launched Operation Sindoor, targeting nine terrorist infrastructure facilities in Pakistan-administered Kashmir with missiles. The Pakistani military stated that they shot down five Indian fighter jets and one drone in response to the attack. As both countries exchanged fire, 36 civilians from either side died and 94 were injured.
Fund flows have been particularly pronounced in exchange-traded funds (ETFs) tracking the Nifty 50 index of India. Individual investors sold off the KODEX India Nifty 50 for 11 consecutive trading days leading up to the previous day, with a sell-off volume of 9.2 billion won. Individual investors have also continued to sell the TIGER India Nifty 50 for 12 consecutive trading days with a net sale of 10.9 billion won.
Despite the India-Pakistan conflict, the Nifty 50 index remained relatively stable. Even on the day before the missile strikes began, it closed the market at 24,414.4, up 34.8 points (0.14%). The Nifty 50 index had dropped to 21,743.65 on the 7th of last month due to the shock from the tariff policy of the Donald Trump administration, but it has since rebounded, recording a year-to-date increase of 3.3%.
The Trump administration warned of a high tariff of 26% for India, but this rate is lower compared to other countries competing to attract foreign investments, such as China and Vietnam. However, with the outbreak of the India-Pakistan conflict, it appears that individual investors are pulling their money out of the Indian stock market for the time being.
The market sees a low likelihood of a local conflict escalating into a full-scale war, considering past cases. The Indian government has emphasized that there is no intention to escalate, citing that it has not attacked facilities of the Pakistani regular army.
The key factor is whether the conflict will prolong. Predictions suggest it may extend, particularly as India has suspended the Indus River Agreement for the first time in 65 years. The Indus River is crucial for Pakistan, accounting for 94% of the country’s total water consumption. Additionally, 23% of Pakistan's Gross Domestic Product (GDP) is linked to the Indus River.
If this conflict remains a short-term local war, its impact on the Indian stock market is expected to be limited. In February 2019, a bomb attack occurred in Pulwama, Indian-administered Kashmir, leading to the outbreak of conflict between India and Pakistan. At that time, the Nifty 50 index fell by about 2.6% compared to its peak, but within three days, the conflict was resolved, and the losses were recovered immediately.
Kim Seung-min, a researcher at KB Securities, noted, "If the India-Pakistan conflict remains short-lived, the impact on the Indian stock market will be limited," but he also mentioned, "Caution should be exercised as heightened religious and ethnic tensions could lead to a prolonged and more complex conflict that may worsen the stock market situation."