Impact of Operation Sindoor on the Indian & Pakistani Economies

The recent stand-off between India and Pakistan known as Indian Operation Sindoor – that is a series of precision strikes conducted against terrorist infrastructure in Pakistan and Pakistan Occupied Kashmir (PoK) - has again challenged the economic strength and weaknesses of both the countries. Post effects of these events are not only playing out on the battlefield but inconveniencing the financial market, trade corridors and the economy at large as of May 9, 2025. This blog looks at the immediate and developing economic impacts on both countries based on the latest updates with a historical context.

Operation Sindoor: Context and Immediate Triggers

Operation Sindoor was launched by India on May 7, 2025, after the alarming killings of 26 civilians during a massive terror attack in Pahalgam, Jammu & Kashmir. The attacks consisted of coordinated missile strikes in nine terrorist presence points in Pakistan and PoK. Pakistan responded with missile and drone attacks; cross-border hostilities escalated; and evacuations were carried out neighbouring the international border.

Indian Economy: Resilience Amidst Geopolitical Tension

Stock Market Response: Stability and Recovery

• Initial Volatility, Quick Recovery:

In the past, Indian stock markets have demonstrated strength when there were confrontations between India and Pakistan militaries. The Nifty 50 and Sensex tend to go down unambitiously to about 5% and then recover strongly in under six months. Operation Sindoor was similar, both indices hit a temporary low before a rebound, confirming the faith of investors in India’s fundamentals.

• Volatility Index Surge:

India’s VIX, an expression of market fear, rose by more than 10% during escalation, yet, the fall of the Nifty index remained only 0.58%, signaling both constrained panic and rapid normalization.

• Foreign Institutional Investment (FII) Inflows:

With continued FII inflows; over ₹43,940 crore inflows in the last 14 sessions, have helped the market resilience, underpinned by a favourable global environment, such as a weak dollar, moderated growth in the US and China and subdued crude oil price.

Broader Economic Impact

• Trade and Investment:

Economic experts and fund managers expect the Operation Sindoor not to have a negative international trade and investment profile for India. Such stability of India’s trading relationships with major partners, such as the UAE and the UK is, in fact, guaranteed through recent advances like the introduction of the India-UK Free Trade Agreement.

• Sectoral Effects:

  • Tourism in Jammu & Kashmir: Tourism disruptions have impacted the region’s economy, but those effects on listed companies are not noticeable.

  • Defence Sector: Some companies which are engaged in the defence industry, for example, Bharat Forge and Bharat Dynamics, are likely be benefiting from increased focus by the government on security and procurement.

• Banking and Cybersecurity:

With the recent development, the Finance Minister has required financial institutions to evaluate their readiness to the cyber world, and banks are in turn inquired to enhance security level in their online business.

Historical Perspective

International negotiations, nuclear potentials, and fears of economics consequences since the late 1990s have also led the two antagonists on a monitored course instead of a full-blown war. India’s perception of strategic planning bears upon manageable escalation to avoid economic effects from military run-ins. Illustrations from the Kargil War (1999), the Parliament attack (2001), the Mumbai attacks (2008), the Uri attack (2016) and the Balakot attack (2019) show that Indian markets typically bounce back post-military engagements.

Pakistani Economy: Acute Vulnerabilities Exposed

Stock Market Turmoil

• Market Crash and Trading Halt:

Though India has not been adversely affected, Pakistan’s stock market has not been spared. A 6% fall of the KSE-100 index, sparked by Operation Sindoor, led to trading being halted. Following a 3% drop yesterday, market prices have kept falling since the Pahalgam attack on April 22.

• Investor Flight and Volatility:

The Pakistani stock market turmoil, marked by low trading volumes and their wavering investor sentiment, has made the escapades of foreign capital quick. As risk aversion increased, there was fierce sell offs which showed the extent that the market is susceptible to international political surprises.

Wider Economic Fallout

• Disrupted Trade and Economic Measures:

The call to suspend the Indus Waters Treaty and new import restrictions imposed on India by vessels and postal deliveries have aggravated the current instability in Pakistani economic and trade process.

• Currency and Inflation Risks:

Although the effects of the economic disruption may not be noticeable presently, its effects may lead to depreciation of Pakistani rupee, which may push inflation up and make Pakistan’s financial situation even worse.

• Structural Fragility:

Having an economy already heavily burdened with a high stock of external debt, weak foreign reserves, and inflation, Pakistan has more difficulties than its neighbor India in tolerance of disruptive consequences of military escalation. A general decline of the KSE-100 index is a prominent indicator of Pakistan’s structural economic problems.

Comparative Table: Economic Impact of Operation Sindoor

Aspect	India	Pakistan
Stock Market	Brief dip, quick recovery; Nifty/Sensex stable	KSE-100 crashed >6%, trading halted
Investor Sentiment	Resilient; FII inflows remain strong	Fragile; rapid foreign investor exit
Trade Impact	Minimal; global ties intact	Disrupted by Indian sanctions
Currency	Stable	At risk of depreciation
Sectoral Impact	Tourism in J&K hit; defence sector gains	Broad-based market losses
Policy Response	Cybersecurity review, border evacuations	No major stabilizing policy yet
Historical Pattern	Quick recovery after tensions	Prolonged volatility, deep losses

Potential Risks and Future Outlook

For India

• Prolonged Conflict:

Experts are expecting the persistence or escalation of hostile activities will result in the increased aversion of investors towards risk; hence, spur more challenges in the market. At this point, unrelated military activities are not anticipated to alter the overall direction of economic development.

• Tourism and Border Economies:

Sensitive zones could experience a decline in visitors’ flow if the situation continues, and economic activities under threat can be registered around the border.

• Cybersecurity Threats:

To protect financial infrastructure from the cyber risks coming from abroad it is necessary to increase the security.

For Pakistan

• Sustained Economic Pressure:

Pakistan’s economic problems may worsen further, if market instability, trade disruptions, and the devaluation of currency continue.

• Investor Confidence:

It will be hard to rebuild investor confidence so long as tensions remain and policy decisions seem unclear.

• External Support:

Pakistan may seek international diplomatic or financial aid to stabilize its economy, but it has to deal with constraints, due to its existing fiscal constraints.

Lessons from History and the Road Ahead

Comparable situations have been posed on each country in the past. India’s economic stability is underpinned by diversified industries and regional and world links as well as robust macroeconomic structures. The continually emerging crises facing Pakistan have revealed that its economy needs immediate correction, diversification, and stronger fiscal stability.

Until May 2025, uncertainty remains the dominant feature. While Indian fiscal markets have rebounded quickly, focusing on important fundamentals and external scenarios, Pakistan’s economy is still feeling the combined aftermath of increasing military campaigns and scathing economic steps.

Conclusion

The Operation Sindoor incidence followed up by the Indo-Pak conflict have brought out the massive inequality between India and Pakistan in the aspect of economic conditions. As a dynamic marketplace with firm trade relationships and assured investor base, India has weathered the crisis with very few aftershocks. Pakistan, by contrast, deals with extreme market fluctuation, trade disruption, and enhanced economic instability.

In the coming weeks the situation will become crucial. In case the tensions subside, economies can easily return to the pre-conflict performance. It is however; however, safe to assume that the continued tensions or the persistent confrontation will strain Pakistan’s fragile economy to its limits.

In the near term the market indicators are sending a clear signal: In spite of anxiety geopolitical events may bring about, economies such as the one in India, which although still volatile, are supported by stable fundamentals and measured policy movements, are best placed to tolerate long-term damage.