Stocks in Pakistan and India rallied as a ceasefire agreement between the two nuclear-armed neighbours calmed markets that had been shaken by military clashes on their border.
Pakistan’s stock benchmark KSE-30 Index closed 9.3% higher, the most since 2008, in a rally that triggered an hour-long trading halt. The NSE Nifty 50 Index rose 3.8% in Mumbai, as both nations stepped back from the brink of war, allowing market participants to turn their focus back to the economic outlook for the South Asian nations. The sentiment also got a boost from the announcement of a temporary trade deal between the US and China.
“Given how quickly things were escalating last week, the developments over the weekend are a move in the positive direction,” said Brussels-based Vivek Dhawan, a fund manager at Candriam. “The focus could return to the Indian growth story.”
Investors had been nervous. The Nifty slid more than 1% on Friday — its steepest fall in over a month — while the rupee was one of Asia’s worst performers last week. Bond yields crept higher as risk premiums widened, although debt purchases by the Reserve Bank of India helped limit the declines. Pakistan’s key stock index had tumbled 9% since the April 22 attack in Kashmir, which prompted India to retaliate.
Foreign investors, who had been on a 16-day buying streak until Friday, may resume inflows, drawn by India’s positive economic signals, including prospects of an early US trade deal, ample liquidity, and anticipated interest rate cuts.
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The Indian rupee rose as much as 0.9% versus the dollar in the offshore market. India’s bonds and currency markets are closed on Monday for a public holiday. Volatility in Indian stocks also nosedived, with the 25,000-rupee calls of the Nifty 50 expiring on Thursday clocking the highest volume.
Still, the threat of renewed tensions remains, as India has yet to lift its abeyance on the Indus Water Treaty — a move that could harm a large part of Pakistan’s farm output. Meanwhile, a top Indian diplomat said that Pakistan violated the truce just hours after it was declared, a claim Pakistan has denied.
“Reports of violations within a few hours of the ceasefire announcement may cast some doubt on its sustainability,” Barclays Bank Plc. strategists including Avanti Save wrote in a note. The UK bank retained overweight on Pakistan credit and expects a reversal in Indian rupee losses.
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Over in Pakistan, traders expect the country’s economic reforms to regain focus as border tensions had eclipsed a surprise interest-rate cut by the State Bank of Pakistan and prospects for additional IMF funding. The International Monetary Fund Friday approved US$1 billion ($1.3 billion) in immediate disbursement along with a new US$1.4 billion plan for climate resilience, which will be a booster for its fragile finances.
Pakistan’s sovereign dollar bonds extended their rally, posting the best performance among emerging-market peers on Monday. The country’s bond due April 2031 jumped 5 cents on the dollar, the biggest gain since June 2023.
Should the ceasefire hold, the upcoming review of the MSCI Inc.’s indexes — where Pakistan’s weight may increase — along with the federal budget will be the next catalysts for the rally to sustain, according to Karachi-based brokerage Arif Habib Ltd.
“With war tensions easing, investor focus is expected to shift back to accelerating economic reforms,” said Ali Raza, head of international equity trading at Bma Capital Management Ltd. “The SBP’s recent rate cut, previously overshadowed, and dual loan disbursement by IMF, will come back into play.”
