Effect Of War On The Economy: A Guide For Indian Investors
The terrorist attacks on April 22, 2025, in Pahalgam, Jammu and Kashmir, India, shook the nation. In response, the Indian Armed Forces carried out a military operation against Pakistani terrorists on May 7, 2025, escalating tensions between the two countries. Some investors are worried that this might convert into a full-scale war.
Although it is very difficult to measure the exact consequences of world wars in advance, it is critical to understand how Indian stock markets reacted to the previous such instances and what are the effects of war on the economy.
War And Market Reaction
Wars are more than just confrontations. They have the potential to cause heavy damage to lives and property and scar the economy for years after a war concludes. The news of a war or a military confrontation can lead to increased volatility in the stock markets.
How Indian and Pakistan Stock Market Responded?
The recent news of war between India and Pakistan has triggered volatility in the stock markets. For example,
- After the Indian defence forces conducted air strikes in Pakistan on 7th May 2025, the Indian stock markets opened 0.59% lower at 24,233, but recovered later in the day to close at 24,414 level1.
- On the other hand, the Pakistan stock exchange crashed by 5% on May 7, 20252.
This shows that the initial stock market reaction to war can be that of market fluctuations and volatility.
Historical Patterns: Do Wars Rails Indian Equities?
Wars are a period of uncertainty. This uncertainty can lead to widespread panic among investors, and in the past, it has triggered volatility in the Indian stock markets, but the Indian stock markets were quick to recover.
For example, in 1999, during the Kargil War, markets were volatile, but as soon as the war concluded, the markets recovered 16.5% in the following month. One month after the Mumbai attacks in 2008, the stock market recovered 3.8%.
Incident | Nifty 50 %-returns (1-month after) |
| Kargil War 1999 | 16.5% |
| Mumbai Attacks 26/11/2008 | 3.8% |
| Uri Attack 2016 | -1.2% |
| Pulwama Attack 2019 | 6.3% |
Source: Business Standard3
This shows how war affects the economy. When the news of war breaks out, there is initial volatility in the stock markets, but markets have time and again recovered after such instances.
Sectors Seeing Early Gains or Losses
As an impact of war, some sectors take priority over others. For the government and investors, sectors like aerospace and defence manufacturing, pharmaceuticals and shipbuilding, which are directly linked to the war effort, take priority over sectors like tourism, aviation and hotels.
For example, after the military escalation between India and Pakistan on May 8 2025, the Nifty India Defence Index is trading 2.4% higher on May 9, 2025 (as of this writing), while the broader stock indices are trading lower.
Historical Data On War and Its Economic Fallout In India
In recent years, effects of wars could be seen in different asset prices. The Indian stock markets were quick to react to these events. The Indian stock markets initially corrected following the news of war, followed by a recovery in the following months.
For example, the announcement of the Russia-Ukraine war on February 24, 2022, increased uncertainty among investors about the disruption of oil and gas supply from Russia4. This news was followed by the Nifty 50 index dropping 4.75% lower at 16,247 level on February 24, 2022. But this drop was followed by a swift recovery, with the index closing March 2022 month at 17,464 level.
Similarly, the announcement of the Israel-Hamas war in October 2023, led investors to believe that this war could escalate and include other Middle Eastern nations. The Nifty 50 index corrected 2.76% in the Month of October 2023. This was again followed by a recovery, with the index closing at 20,133 level in November 2023.
Trade and Fiscal Fallout
The effects of war on the economy are often first felt by the stock markets. This is often followed by a disruption in the imports and exports for the country.
The fiscal deficit, that is the difference between the revenues and expenditures of the government can also increase, because of higher war related expenses. This can lead to increased borrowing by the government.
In addition to its impact on fiscal stability, war also poses significant risks to global trade dynamics.
1. Disrupted Trade Routes and Sanctions
It is important to understand how war affects global trade. Trade routes of a war-torn country can be disrupted in the following ways:
- International trading partners are often reluctant to send or receive cargo ships to a war-torn country, suspecting an enemy attack.
- The country involved in war is usually unable to make the exports that it does regularly since manufacturing gets hampered.
- A country can also face sanctions from other countries if the other countries believe that the war is unjust and unnecessary.
For example, select Russian banks were blocked from the SWIFT international payment banking system by Europe and the USA as a sanction after the Russia-Ukraine war began in 2022.
Sanctions and trade disruption can have long-term economic effects on a country.
2. Defence Budgets And Fiscal Deficit Risks
In a war economy, the government can also increase the defence budget. This involves procurement and mobilisation of the armed forces and equipment.
The increased spending can increase the possibility of larger fiscal deficits since the government expenditure increases without any significant increase in the government revenues. This can force the government to borrow money. Often war and recession can come up together.
The economic strain is not limited to long-term projections, even in ongoing geopolitical tensions, its immediate effects can be seen.
3. Pakistan’s Fragile Economic Position
In the midst of the India and Pakistan escalation, the Pakistan economy stands on shaky ground7. Pakistan holds a high foreign debt and low foreign reserves, making it highly susceptible to default in case of a war.
For example, Pakistan will see $22 billion worth of debt maturing in FY25, which will be difficult to pay in case of a war. This would make international lenders reluctant to lend money to Pakistan in the future.
Sector Winners And Losers
In most crises, the defence sector can rally as nations increase their military preparedness. Companies involved in manufacturing arms, surveillance systems, and aerospace technologies can be early beneficiaries. This shows how war can affect the economy positively in specific sectors.
Essential sectors like FMCG and pharmaceuticals can remain stable or even gain modestly as consumer demand for necessities and medicines persists during crises.
On the other hand, sectors like aviation, hospitality, and consumer goods often witness sharp declines due to reduced consumer spending and increased savings.
Tactical Investor Moves in Geopolitical Crises
In times of crisis, investors need to be proactive, they have to take measures to safeguard their portfolios from potentially big losses and possible inflation during wartime.
Equities: Stay, Rotate, or Rebalance?
Rather than exiting equities entirely, investors can choose to invest in defensive sectors, and reduce exposure in sectors affected by war adversely. Investors also have the option to square off a portion of their position instead of selling entirely.
For example, historic data shows that the Nifty 50 index shows an average correction of around 7% following any India-Pakistan conflict8.
Bonds and Fixed Income Strategy
During crises, investors often turn to government bonds of other countries and fixed-income securities. Government bonds have a lower risk profile as compared to stocks. These securities are often included in portfolios to help lower overall risk.
For example, stocks can possibly take a dive during a crisis but government bonds keep paying interest. Even if the government reduces the interest rates, it is offset by increase in bond prices.
Gold, Cash, and Safe Asset Allocation
In times of crisis, investors and governments rush to buy gold and stable currencies like the US dollar. Gold is accepted worldwide, and its value can not reach zero. Investors can choose to allocate a portion of their portfolio in safe assets to reduce the overall volatility. Keeping a modest cash reserve can also be helpful.
Portfolio Hedging for Geopolitical Risk
Investors who understand complicated hedging strategies can use derivatives like futures and option contracts to safeguard their portfolios. Investors can take offsetting positions.
For example, a short contract in index futures will increase in value if the index drops. This will offset any losses incurred in the stocks held in the portfolio.
Long-Term Risk Mitigation Strategies
Apart from short-term solutions, investors need a long-term strategy to deal with any geopolitical crisis that can potentially impact their portfolio in the future. Some investor strategies during war are:
- Invest a portion of your portfolio in equities of other countries. Investors can choose stable economies like the USA, UK and Canada for investment.
- Invest a part of your portfolio in safe assets like foreign currency, gold and government bonds.
Diversification can help investors in creating a balance between safety and high returns.
Conclusion
The exact degree of effects of war on the economy are difficult to predict. Each war is different, and with changing conditions of the economy, each reaction to the news of war is also different. Investors can employ diversification strategies to safeguard their portfolios from adverse shocks.
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FAQs On The Effects Of War On The Economy
1. What are the biggest effects of war?
War leads to loss of life and property. One side loses the war, and the other faces the potential economic consequences. Stock markets can be affected, and there can be losses for the investors. The uncertainty is also at its peak during a war that can further hamper the sentiment of investors and all stakeholders.
2. Which sectors are most affected by geopolitical conflicts?
Geopolitical conflicts usually have adverse impacts on the economy, which has the potential to lower consumer spending. As a result, sectors like consumer electronics, tourism, aviation, clothing or apparel and entertainment can be affected. The banking and finance sectors can also be affected if there are sanctions imposed on a country.
3. Does war lead to inflation or recession?
War can lead to both inflation and recession, depending on its scale and duration. Supply chain disruptions, higher defence spending, and commodity price spikes often fuel inflation. While war can negatively impact consumer demand and investment and potentially cause recessions, particularly in nations directly engaged in conflict or significantly dependent on international trade, prolonged wars carry a higher risk of these adverse economic effects.
References:
1. NSE Indices, accessed from: https://www.niftyindices.com/reports/historical-data
2. The Business Standard, accessed from: https://www.business-standard.com/markets/news/operation-sindoor-how-have-stock-markets-reacted-to-india-pak-war-in-past-125050700765_1.html
3. The Business Standard, accessed from: https://www.business-standard.com/markets/news/operation-sindoor-how-have-stock-markets-reacted-to-india-pak-war-in-past-125050700765_1.html
4. The Financial Express, accessed from: https://www.financialexpress.com/market/share-market-today-live-updates-sensex-nifty-rupee-vs-dollar-sgx-nifty-lic-ipo-india-ratings-economic-growth-24-february-2022-thursday-2443225/
5. Trading View, accessed from: //in.tradingview.com/#main-market-summary
6. Trading View, accessed from: https://in.tradingview.com/#main-market-summary
7. The Indian Express, accessed from: https://indianexpress.com/article/business/pakistan-economy-imf-meet-funds-military-conflict-india-9992357/
8. NDTV Profit, accessed from: https://www.ndtvprofit.com/markets/operation-sindoor-stock-markets-nifty-performance-india-pakistan-conflict-historical-trends
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