Did Indo-Pak Tensions Affect India’s Economic Indicators?

By Anit Mukherjee —

Bombay Stock Exchange in Mumbai, India. Source: Scalino’s flickr photostream, used under a creative commons license.

India and Pakistan recently came close to a full-scale conflict that threatened to destabilize the region. The Indian government responded to the Pulwama attack on Indian security forces in Kashmir on February 14 by ordering air strikes inside Pakistan on February 25, which was followed by retaliatory attacks by Pakistan on February 26. Tensions ran high as Pakistan captured an Indian air force pilot but handed him over on March 1. The situation was de-escalated and the sub-continent has been calm ever since.

External shocks can create uncertainty in the investor community who respond by minimizing their exposure to the country or region. In India’s case, the immediate impact is often reflected in stock market and exchange rate fluctuations and foreign institutional investment flows. Domestic uncertainty creates volatility in stock prices, exchange rate responds to a sudden change in foreign currency demand and foreign investors adjust their exposure to the market in crisis depending on their risk tolerance and long-term threat of instability.

Did the recent crisis affect India’s economic indicators? Reviewing the numbers does not show evidence that it adversely affected India’s economy over the longer term, although there was understandably some short-term volatility.

Figure 1: Bombay Stock Exchange Sensex Trading Levels January to March 2019

Figure 1: The Bombay Stock Exchange (BSE) Sensex from January to mid-March 2019, including the recent India-Pakistan crisis in late February. Source: TradeinEconomics.com, compiled by CSIS Wadhwani Chair staff.

The Bombay Stock Exchange (BSE) Sensex hit a historical high of nearly 37,000 on February 7 and was on a downward trend when the Pulwama attacks happened. It hit a low of 35,352 on February 19, losing almost 2.5 percent from the date of the attack. However, it gained nearly 3 percent thereafter until March 5 through the period of escalating tension and the final rapprochement, dipping slightly on the days of the airstrikes. The market volatility during this period was not very different from what the Sensex witnessed in the first half of February, and hit another historic high of 39,056 on April 2.

Figure 2: U.S. Dollar – Indian Rupee Exchange Rate in February & March 2019

Figure 2: The U.S. dollar – Indian rupee exchange rate in February and March 2019, compiled by CSIS Wadhwani Chair staff.

The rupee-dollar exchange rate fluctuations followed a similar pattern. The rupee lost 0.6 percent of its value between February 13 and 15 when the markets closed for the weekend. It slightly gained in value until the airstrikes and subsequently lost less than half a percent during the week of heightened tension. The rupee gained nearly 1.4 percent against the dollar in the week following the de-escalation.

Figure 3: India’s Fortnightly Foreign Institutional Investment from January to March 2019   

Figure 3: India’s fortnightly foreign investment from January to March 2019 in billions U.S. dollars. Source: Data from National Securities Deposit Ltd, compiled by CSIS Wadhwani Chair staff.


While the stock market and exchange rate are good indicators to ascertain the immediate effect of an external shock, fortnightly foreign institutional investment (FII) numbers provide a longer term assessment of country risk. Net FII inflows were negative in January and were on an upward trend when the Pulwama attacks happened. There was no change in the trajectory during the second half of February when the tensions were high, with net FII flows touching nearly $1 billion. Surprisingly, we find a very sharp increase in FII through March, with net inflows cumulatively touching $7 billion during the month.

So did the Indo-Pak tensions affect India’s economic indicators? The numbers show that largely they did not, except for very short periods around the key incidents in the last two weeks of February.

Dr. Anit Mukherjee is an adjunct fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS and a policy fellow with the Center for Global Development. Follow him on twitter @Anitnath.


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