There is a ceasefire between India and Pakistan now. However, it is also a phase when emotions take over everything in our heads. There is a lot of anxiety and uncertainty. It is the environment you do not desire if you seek a secure financial future.
The timing of the skirmish triggered by the horrific killing of 26 innocent civilians in Pahalgam, Jammu and Kashmir, is unfortunate. India was emerging as an alternative manufacturing or service base for global multinationals. The relentless trade war between the US and China created new opportunities for nations like India. The sudden war appears to have put brakes on the momentum that India was building economically. Investors will not ignore that. Interest in the Indian stock market from foreign portfolio investors was back. We had a situation where foreigners and domestic investors bought Indian shares ahead of the recent conflict. The Rupee gathered strength from an all-time low of over Rs 88 to less than Rs 85.
The reaction to the war was initially muted. However, last Friday, there was a sharp selloff in equities, bonds, and currency. Even then, Indian financial markets have shown significant resilience. The government bonds market usually sees the first reaction to a war. The 10-year bond yields tend to spike as the risk premium goes up. Much money (much bigger than equity markets) moves out of bond markets when investors are fearful.
However, financial markets showed incredible maturity. There is only a marginal increase in 10-year Indian bond yields, and bond markets are not bothered as India’s economy is strong enough to sustain a conflict. The stock market has enough depth, and the downturn showed investors backing companies making defence equipment.
The diversity of investors in the Indian equity markets, including foreigners, domestic institutions and retail investors, gives it enough depth. The purpose of buying or selling securities in financial markets is different for all types of investors. The risk they perceive is relative, too. For example, foreigners may think India is a good alternative manufacturing location for China. They foresee an increase in India's economic activity and are backing businesses supporting India’s future growth. Domestic investors are receiving a sizeable chunk of retail money through systematic investment plans of mutual funds. While stock market valuations are at a record high despite the war, investors would move in if there is a sharp selloff.
Greed and fear
This column has always maintained that market prices are driven by greed and fear. The India VIX index has jumped significantly since 22 April, when the Pahalgam massacre happened. However, it is still below 7 April 2025, when share prices fell the most since COVID-19 days. It will cool off as the ceasefire is implemented and peace prevails. Your long-term investments need not find a new direction. There is a significant drop in the ratio of mutual fund SIP accounts closed to open. More of you are stopping systematic investment, the data shows. If the reason is fear, you are probably not doing justice to your future self.
Warren Buffett, the legendary American investor, stepped down as the CEO of Berkshire Hathaway, the firm he ran for six decades. His idea of being greedy when others are fearful and vice versa has put his firm among the most valuable companies in the world. While he continues to fear investing in equities and has left a war chest of over $350bn for his successor to find appropriate investments, that fortune was not built overnight. He rode through market cycles by staying invested and investing more when prices fell. If you are confident of your future income and future profits of Indian companies, you can prosper by staying invested.