Terror, Treaties, and the Ticker

On April 22nd, a tragic terrorist attack in Pahalgam, Kashmir, claimed 26 innocent lives. The assailants, linked to Pakistan-based groups, targeted unarmed civilians, mostly tourists. The impact was not just emotional or geopolitical. Within 24 hours, ripples of uncertainty began reaching Dalal Street.

While markets did not crash, they reacted. The Nifty 50 and Sensex saw a noticeable dip, driven largely by investor caution. Sectors closely linked to tourism and hospitality — Indian Hotels, Lemon Tree, MakeMyTrip — saw sharp declines. With Kashmir already a sensitive zone, the attack reignited fears around travel safety in North India. The market began pricing in reduced tourism demand for Q2 and potentially even Q3, especially with summer travel plans under threat.

More consequential, however, was India’s diplomatic response. By suspending the Indus Waters Treaty and other bilateral agreements, the government signalled a shift in tone. Though symbolic in the immediate sense, these suspensions represent growing unpredictability in India-Pakistan relations. For the Indian stock market, especially foreign institutional investors (FIIS), this matters. Political stability is a key criterion in determining investment appetite. Treaty suspensions and threats of escalation push India’s perceived risk higher. It won’t cause mass exits, but it does encourage caution, and in a global environment already riddled with inflation and interest rate uncertainty, that’s enough to cause hesitation.

The impact was not uniform across sectors. Tourism, aviation, and hospitality were the worst hit. Domestic travel sentiment, especially toward Jammu and Kashmir, is expected to suffer. Even major airlines like IndiGo may face short-term losses due to reduced passenger volumes and rerouted traffic.

On the other hand, defence stocks gained. Bharat Electronics, HAL, Bharat Dynamics—all saw increased volumes and price momentum. The logic is simple: an attack of this magnitude almost always leads to increased defence spending. Investors know this, and the market reacts fast. If the government announces new defence allocations or procurement under Make in India, these stocks will likely sustain their upward trend.

Another interesting sector to watch is hydropower. With the Indus Waters Treaty under question, water rights and resource-sharing become volatile topics. Companies like NHPC that rely on river projects in the north could face planning delays and political risk. Long-term infrastructure and public-private partnerships in these regions may be reassessed depending on how the diplomatic standoff unfolds.

Investor sentiment has been cautious, not panicked. After the attack, the rupee slipped slightly against the dollar, reflecting a temporary flight to safety. FIIs trimmed positions modestly, and many domestic investors have opted to stay on the sidelines. No large-scale withdrawals have been recorded, but inflows into equity mutual funds may slow down in the coming weeks.

Historically, markets recover from such geopolitical shocks. After Pulwama in 2019, or even the Mumbai attacks in 2008, short-term dips were followed by strong recoveries. India’s market strength lies in its consumption engine and long-term growth narrative. Unless there is prolonged military escalation or international involvement, the market will likely stabilise.

But there is one wildcard this time: the tone of diplomacy. The suspension of the Indus Waters Treaty, though not new in terms of political rhetoric, is still a sharp move. If it escalates into an international legal battle or triggers retaliatory moves from Pakistan, like airspace closures, trade bans, or cross-border fire, the market will respond. Investors are watching closely not just for statements from New Delhi, but also Islamabad and Washington.

In conclusion, the April 22 attack may not have caused sustained market disruption, but there is renewed interest in how fragile political stability can influence investor behaviour. The Indian stock market remains fundamentally strong, but short-term volatility is here to stay. For investors, the strategy is clear: stay informed, stay diversified, and stay calm.