When the country entered the year 2019, much volatility in the market was anticipated due to the presentation of the interim budget, followed by general election during the summers. However, the recent turn of events has created a much bigger turmoil than it was expected. On 14 February 2019, a Jaish-e-Mohammed (JeM) suicide bomber attacked a convoy of vehicles carrying security personnel of Central Reserve Police Force (CRPF). The attack resulted in the deaths of more than 40 jawans, making it one of the deadliest attack on security personals in Kashmir’s history. 

According to several reports, the attack was carried out by JeM operative Adil Ahmed Dar when he rammed an SUV loaded with more than 350 kg of explosive into the buses carrying CRPF  paramilitary troopers. The attack’s responsibility was immediately claimed by Jaish-e-Mohammed, an Islamist terrorist group based in Pakistan.

India Withdrew the Most Favoured Nation (MFN) Status From Pakistan 

The incident tip the already heated Indo-Pak relation to the point of boiling, which resulted in numerous cross country diplomatic actions. In the aftermath of the attack, India withdrew Pakistan from the Most Favoured Nation (MFN) status and hiked the customs duty on imported goods from the rival to 200%.

On February 22 the Financial Action Task Force (FATF), on the request of the government of India to put Pakistan on the blacklist, gave Pakistan the deadline of October 2019 (while keeping it on the greylist) to comply with the 27 conditions laid in June 2018. The FATF asked Pakistan to move quickly to meet the deadline, failing to which will attract blacklisting of the nation. Other voices from India also reacted on the Pulwama attack, including farmers refusing to export their goods to Pakistan, film industry implementing a ban on the Pakistani artist to some even going forward suggesting to cut all diplomatic ties with Pakistan.

Diplomatic Actions Against Pakistan

In the recent wake of events, India’s Minister of Water Resources, Nitin Gadkari tweeted that India has decided to stop the flow of their share of water (under the Indus Water Treaty) to Pakistan. He even went further suggesting that India should scrap the Indus Water Treaty altogether and prevent even a single drop of water reaching the country. These calls for actions caused a prompt reaction from Pakistan which responded by writing letters to World Bank, UNESCO to interfere into the matter.

Following this, the European Union asked Pakistan to take ‘clear and sustained’ actions against all terrorist groups. Federica Mogherini, High Representative of the EU for Foreign Affairs and Security Policy and Vice-President of the EU Commission, in a statement to Pakistan said that the country needs to “continue addressing terrorism including clear and sustained actions targeting not only all United Nations-listed transnational terrorist groups but also individuals claiming responsibility for such attacks” while urging the two nations to de-escalate the tension built after the Pulwama attack.

Such geopolitical events (war, nuclear aggression, terrorist attacks etc.) have much greater impacts on the stock market than it is anticipated, however, the wide impact of such events differ from country to country.

Impact On the Stock Market

The market closely reacted as the information regarding the Pulwama attack unfolded. During the first three days of the Pulwama attack, the Foreign institutional investors (FIIs) withdrew Rs. 3019.98 crores from the equity market whereas the Domestic institutional investors (DIIs) injected Rs. 4353.84 crores in the market during the same period. However, after the initial sandstorm, FIIs returned to the market and has infused Rs 6,194.33 crores as of now, into the market.

On the other hand, DIIs took some money out of the system and as of now has invested Rs. 3761.69 crores in the market. FIIs in the equity segment from February 14 to February 18 were net sellers as the cash outflow stood at Rs. 4900.07 crores. However, as of February 22, the FIIs have infused more than they took out as the cash inflow stands at Rs. 8117.3 crores (Rs 12,132.10 crores infused on Feb. 22). The FIIs, in the debt segment, as of February 22 has pulled out around Rs. 3042 crores from the market.

India Stricks Back

On 26 February 2019, the spokesperson of Pakistan Armed Forces alleged that the Indian Air Force violated the Line of Control (LOC) by entering Pakistani air space to drop payload near Balakot. The Foreign Secretary of India, Vijay Keshav Gokhale, in a press briefing confirmed the air strike carried out by the Indian Air Force aimed to eliminate the training camp ran by Jaish-e-Mohammed (JeM). Gokhale said that the intelligence input was received that JeM was running multiple training camps in Pakistan and in Pakistan occupied J&K, which was scared time to time with Pakistan, however, no action was taken by the nation.

He added “Credible intelligence was received that the Jaish-e-Mohammed was planning other suicide terror attacks in various parts of the country and the fidayeen jihadis were being trained for this purpose. In the face of imminent danger, a preemptive strike became absolutely necessary.” Gokhale also said that India struck the biggest training camp of JeM in Balakot eliminating “a very large number of JeM terrorists, trainers, senior commanders and groups of jihadis.” Now all eyes are on the Pakistani Prime Minister who called a meeting after the Indian Air Force strike, quoting “Pakistan reserve the right to reply.”

Foreign Investors Remain Cautious

It is expected that the stock market can witness a high level of volatility and huge correction, depending on the nature of the retaliation from Pakistan. The Indian equity market is currently considered as ‘High Beta’ amongst the global equity market. According to numerous studies, there is a correlation between a higher level of geopolitical risk and the flow of capital from the economy under stress to the developed economy which are often considered as ‘safe haven’. Thus if the tension between India-Pakistan rises, we may witness an outflow of capital from the Indian equity market. FIIs have already positioned themselves in the selling mode and an increase in tension will lead to more capital outflow.