The deadly April 22 terror attack in India’s Pahalgam has rattled Pakistan’s financial markets, sending the down nearly 4%, while India’s has gained 1.5%—reflecting the stark contrast in economic resilience and investor confidence as escalate between the nuclear-armed neighbors.
The Karachi Stock Exchange’s KSE-100 index has plunged 3.7% between April 23 and May 5, rattled by fears of military escalation after the deadly attack in Pahalgam that killed 26 people, allegedly by Pakistan-based militants.
The selloff deepened on April 30, when the KSE-100 plummeted 3.09%—its worst day in weeks—dragged down by heavyweights like LUCK, ENGROH, UBL, PPL, and FFC. While the market rebounded 2.5% on May 2, analysts caution this may be a “dead-cat bounce” unless tensions ease.
India’s BSE Sensex, meanwhile, has defied regional risks, rising 1.5% since the attack. Brokerage Anand Rathi noted that “except during the Parliament attack in 2001, Indian equity markets did not correct more than 2% during periods of high tension with Pakistan,” and even in the case of significant escalation, the brokerage sees the Nifty 50 falling no more than 5–10%.
Economic fallout
Ratings agency Moody’s warned that “sustained escalation in tensions with India would likely weigh on Pakistan’s growth and hamper the government’s ongoing fiscal consolidation,” threatening to derail a fragile economic recovery marked by falling inflation and rising foreign-exchange reserves under an IMF program. A prolonged crisis, Moody’s cautioned, could impair Pakistan’s access to external financing and further strain reserves already inadequate to cover looming debt repayments.
India, meanwhile, remains largely insulated. “Comparatively, the macroeconomic conditions in India would be stable, bolstered by moderating but still high levels of growth amid strong public investment and healthy private consumption,” Moody’s said. Given that Pakistan accounts for less than 0.5% of India’s exports, direct economic spillover is expected to be minimal, though Moody’s flagged that higher defense spending could weigh on India’s fiscal trajectory.
Diplomatic and military escalation
India has launched a sweeping diplomatic and military response following the . New Delhi suspended the , closed the Integrated Check Post at Attari, cut diplomatic staff, and granted its military full autonomy in crafting a response. The Indian Army has since retaliated to multiple ceasefire violations along the Line of Control, while Pakistan has reportedly deployed air defense and artillery units near the border.
In a striking escalation, India has begun physically restricting river flows into Pakistan under the Indus Waters Treaty, a move signaling the use of water as a diplomatic weapon. India cut off water from the Baglihar Dam on the Chenab River—one of the key rivers allocated to Pakistan under the 1960 treaty—and is reportedly planning restrictions at the Kishanganga Dam on the Jhelum River. These hydroelectric dams give India the ability to control the timing of water releases, amplifying pressure on Pakistan’s already stressed water resources.
Despite hotline talks between the two militaries, tensions remain high. Pakistan’s Ambassador to the U.S., Rizwan Saeed Sheikh, has appealed to President Donald Trump to help de-escalate the crisis, warning that Kashmir remains a global flashpoint.
Foreign flows and market sentiment
Foreign institutional investors have largely stood firm in India, signaling global confidence in its ability to manage regional tensions. Over the past 12 sessions, foreign portfolio investors (FPIs) have snapped up Rs 401.47 billion ($4.8 billion) worth of shares—the longest buying streak in two years.
In Pakistan, however, the market rout points to rising fears of capital flight, with foreign investors likely wary of the deteriorating security and economic picture.
Historical context: Markets vs. Conflict
India and Pakistan have endured repeated military flare-ups, from the 1999 Kargil conflict to the 2001 Parliament attack. Yet Anand Rathi’s analysis shows Indian markets have historically weathered these tensions, with only limited corrections often driven more by global headwinds than by local conflict.