Surgical Strikes

How much will it impact Indian markets?

In the wee hours of September 29th, the Indian army carried out a series of surgical strikes on terrorist installations in the area adjacent to the Line of Control (LOC) in Pakistan Occupied Kashmir (POK). Even as India continues to congratulate itself, it may be time to sit back and evaluate its implications for Indian markets…

Volatility in the short term… 

Nothing captured the panic in the markets better than the sharp 35% rise in the VIX in the aftermath of these surgical strikes. The reasons are not far to seek. Between India and Pakistan they house close to 20% of the world’s population. Additionally, both India and Pakistan are nuclear powers and any such move has the tendency to create unrest in South Asia. One cannot ignore the China factor too. While China has kept a safe distance from the entire issue, they may not continue to be neutral if things degenerate into a full-fledged war. That is when the situation could get really turbulent as all the 3 countries are densely populated, they are nuclear powers and two of these nations are expected to drive world growth in the coming years. It is this uncertainty that is making markets in the short term volatile.

Sanity in the longer term… 

The good news is that neither India nor Pakistan will have the intent to push themselves into a full-fledged war. For the record, India would definitely like to focus on more pressing issues like increasing GDP growth, improving hard infrastructure, rolling out GST etc. A full-fledged war at this point of time would be an unnecessary indulgence and an avoidable expense. Pakistan is already in a state of financial stress and they are hardly in a position to afford a war. At best it may lead to a change in political equations within Pakistan, but it is unlikely to lead to a full-fledged war. China, of course, has billions of dollars invested in Pakistan in its proposed New Silk Route and would not want any disruption. So, in the long term there is limited risk of a major escalation.

Address the Kashmir issue…

The recent surgical strikes may be the time for both India and Pakistan to think seriously in terms of a lasting solution to the problem of Kashmir. For long-term peace in the South Asian region, this is essential. Remember, there is always a premium that investors will be willing to pay for peace and when that peace is combined with growth the results can be geometric. India must use this euphoria created by the strikes to take a step towards a lasting solution in Kashmir. That will be our biggest achievement. Historically, wars have formed the base for Indian bull markets and the 8-year cycle also favors that theory. But for that, a lasting solution to Kashmir is a pre-requisite. ©

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