For investors, this escalation couldn’t have come at a worse time. Indian equities had turned positive for the year, driven by a strong 10% rally from the March lows as global trade tensions eased, the domestic currency stabilized, and FII buying resumed.
Just as the market was beginning to recover from a valuation-driven correction and Trump’s policy flip-flops, sentiment has soured once again. Headline indices took a sharp hit, with the Nifty slipping below the 24,000 mark and the Sensex plunging over 850 points in intraday trade.
Escalating geopolitical tensions, including the recent Pahalgam terrorist attack and subsequent developments along the Line of Control largely drive the steep decline.
Pakistan’s response to India’s strong reaction—such as suspending the Indus Water Treaty—has increased the risk of a potential military standoff. With reports of cross-border firing emerging, investors have turned risk-averse, especially ahead of the weekend, choosing to avoid long positions amid the uncertainty.
Small- and mid-cap stocks came under sharper pressure, registering steep declines of 2.6% and 2.3%, respectively. Despite the correction, analysts note that many of these stocks continue to trade at above-average valuations.
Will the problem of Pakistan threaten recovery in Indian markets?
As with any India-Pakistan conflict, the biggest risk to Indian markets is participants choosing to stay on the sidelines.
“The potential headwind looming large on the horizon is the uncertainty regarding India’s response to the terror attack and its consequences,” said Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Analysts noted that while the current situation has triggered temporary distress—particularly in the broader market—it appears to be sentiment-driven and linked to short-term geopolitical risks.
“A bounce-back can be anticipated early next week, depending on how events unfold over the weekend,” said Swapnil Aggarwal, Director, VSRK Capital.
InCred Equities, in a strategy report, noted that recent policy actions by the government and the RBI are aimed at boosting GDP growth momentum. However, global trade tensions and geopolitical developments are likely to offset any short-term gains.
Earnings Momentum Weak
Despite the seasonally strong March quarter, consensus earnings growth expectations for Q4 remain muted at just 8% year-on-year, with no end in sight to the ongoing EPS downgrade cycle.
Results from IT and FMCG majors have failed to inspire confidence. If the geopolitical situation with Pakistan deteriorates further, it could deal a double blow to market sentiment in the short term.
The Nifty50 forward P/E is currently trading below its 10-year average, offering some valuation comfort.
“We roll forward our Nifty50 target to FY27F EPS and raise the bull-case probability to 25%, reflecting the potential benefits of better-than-expected rainfall and easing crude oil prices. This leads to a 4% upgrade in our blended target to 24,280,” InCred said.
In the mid- and small-cap space, the recent sharp rally has led to a premium valuation of 20–35% over the Nifty50, which analysts view as a cause for concern.
“With policy uncertainty likely to persist in the coming months, equity market volatility will remain elevated,” the report added.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
