India and Pakistan have fought many wars since independence. Kashmir - which came under militancy since 1990 onwards - primarily sponsored by Pakistan has become a major sore point of relations between the two countries. It is India's policy now that unless Pakistan stops supporting terrorists in Kashmir no talks can happen between the two countries.
India - Pakistan - major events since Independence
(Source : moneycontrol.com)
On February 14th, a terrorist carried out suicide attack on an Indian Paramilitary convoy in Pulwama killing 45 soldiers.
Since then tensions between the two countries have been detoriating. On the Feb 25th-26th night, Indian jets carried out "pre-emptive non military" action against terrorist training camps in Pakistan's Balakot. The event was significant as Balakot is located in Pakistan - beyond the Pakistan Occupied Kashmir and hence is considered a major success. On 27th Feb Pakistani jets crossed the LOC (line of control - the de-facto border between two countries) and were repulsed by Indian fighter jets. In the skirmish one Indian pilot was captured by Pakistani forces and both India and Pakistan lost one jet each.
The reactions in the Indian Stock markets has not been much - may be because an action by India was expected and possibly the Indian economy is resilient enough to "absorb the cost" of a low scale conflict or war.
However the impact was on the currency markets - especially after Feb 14th.
NSE - NIFTY Past one month
( Feb 14th is when Pulwama terror attacks happened followed by air strikes by India on Feb 25th)
(Source: www.nseindia.com)
However INR suffered in the aftermath of Pulwama attacks
(Source : Bloomberg)
All geopolitical events -especially tensions between countries - are extremely unpredictable. The trade between two countries through its border continues and has not been stopped.
However the situation remains extremely volatile and can escalate very fast.
At this juncture the best is to stay invested and wait for this even to "play out" and the tensions to ease.
However if there is a sudden escalation one can see a sell off in the markets. Even in such a situation it might be worthwhile to wait and watch and only when there is an extreme escalation - should one consider an exit.
This is primarily because "extreme escalation" probability remains very low.
In this continuously evolving situation - we remain at best in a reactive mode. A proactive strategy seems to be of no use, as one cannot predict which way the situation will turn.
Perhaps that is the reason why Indian markets have not seen a sharp fall.
However we continue to watch the situation very carefully as much as we continue to hope for the defeat of terrorism in India and the most for the safe return of our brave Pilot.
May god give strength to him and his family in these times....
