The latest escalation between Pakistan and India was triggered by a deadly attack in Pahalgam, Indian-administered Kashmir, where gunmen killed at least 26 people-the deadliest incident in the region in 25 years. The Resistance Front (TRF), believed to be linked to the Pakistan-based Lashkar-e-Taiba, claimed responsibility. India responded with a series of strong retaliatory measures, including suspending a historic water-sharing treaty, closing the main land border with Pakistan, expelling diplomats, and ordering certain Pakistani visa holders to leave within 48 hours23.
In response to India’s moves, Pakistan announced a series of retaliatory diplomatic measures. These included suspending a canal irrigation initiative and publicly rejecting Indiaโs allegations of involvement in the attack, demanding proof to substantiate the claims. Pakistani Prime Minister Shehbaz Sharif described Indiaโs actions as unilateral, politically motivated, and lacking legal foundation. The Pakistani government also convened to review further responses2.
The heightened tensions and tit-for-tat measures have injected significant volatility into Indian financial markets. After the Pahalgam attack and subsequent escalation, the Indian stock market experienced a sharp sell-off: the Sensex fell by 589 points (0.74%), and the Nifty50 dropped by 207 points (0.86%) on April 25, 20258. Sectors such as tourism, aviation, banking, and metals were particularly hard hit, while IT stocks showed some resilience81. The broader market sentiment turned risk-averse, with a significant increase in the India VIX volatility index8.
Despite the immediate shock, historical analysis suggests that Indian markets have shown resilience during past India-Pakistan conflicts. Corrections have typically been limited to 1โ2%, with even worst-case scenarios rarely exceeding a 5โ10% drop, and recoveries often follow quickly once tensions ease954. However, the current situation has heightened investor caution, especially given the risk of further escalation and cross-border incidents10.
Both countries have exchanged strong rhetoric and implemented measures that impact not just bilateral relations but also regional stability. The suspension of the Indus Water Treaty and cross-border firing have raised concerns about the potential for broader conflict, though both governments have so far limited their actions to diplomatic and economic spheres rather than full-scale military engagement239.
Pakistanโs retaliation to Indiaโs strong measures following the Kashmir attack has intensified diplomatic and economic hostilities, causing immediate shocks in Indian markets and raising the specter of further escalation. However, historical precedent suggests that unless the conflict escalates to full-scale war, the economic and market impact is likely to be sharp but short-lived, with resilience expected once tensions subside
