Markets on Edge as Pahalgam Attack Sparks Caution; J&K Bank Tumbles

Markets on Edge as Pahalgam Attack Sparks Caution; J&K Bank Tumbles, Earnings and Flows Offer No Comfort

Mumbai 25th April: Following one of the deadliest terrorist attacks in Kashmir since Pulwama, Indian share markets have turned defensive, bracing for the potential shockwaves of geopolitical risk aversion. The Pahalgam attack, which claimed the lives of more than two dozen individuals, has raised concerns over possible military and diplomatic retaliation. While the initial market response has been subdued, any escalation could quickly shake investor sentiment.

The wider indices have been flat to negative in recent sessions, reflecting investor apprehension. Investors are adopting a “wait-and-watch” strategy. If tensions stabilise, consolidation may follow. However, any escalation could prompt a shift in market direction.

J&K Bank: From Rally to Rout

The stock boring the flaws of the tragedy was J&K Bank. After a strong rally of more than 24% between 11 April and 22 April, the stock plunged nearly 15% following the Pahalgam attack. On 25 April alone, the stock dropped more than 6%, falling to ₹96.10. The regional risks between the stress in the valley and a sharp reversal in operating performance reflect investor concerns.

Banks Remain the Market’s Anchor as Earnings Show Limited Support

Beyond J&K Bank, the financial sector has been a key driver of recent market gains. Since 9 April, banking stocks have contributed nearly a third to the Nifty 50’s 1,850-point rise, supported by liquidity infusion, short-covering, and value rotation. Much of the short interest has been covered, but if fear returns, the market could face a decline, with momentum quickly fading.

However, even before the attack, Q4 FY25 earnings painted a sombre picture. Operating profit and net profit growth have slowed over multiple quarters. Heavyweight stocks like Infosys, TCS, and Hindustan Unilever reported disappointing numbers. With rising macro risks, the market is vulnerable to rapid earnings shortages

Foreign Flows Add to the Puzzle

Adding complexity is the unpredictable behaviour of foreign institutional investors (FII). While FIIs bought around $3 billion in the past week, they remain net sellers for April. There is a belief that recent fund inflows are not so much driven by confidence in India, as much as it is by tactical movements out of the US market during policy uncertainty. Fund inflows are uncertain and, in case the crisis intensifies, they can shift in a split second.

Bottom Line

It is widely acknowledged that India’s macroeconomic fundamentals are relatively strong. However, the direction of the market over the short term will be based in large part on two factors: the scale of India’s reaction to the Pahalgam attack and whether or not corporate earnings can sustain valuations. Investors are waiting, at least for the time being, on both the geopolitical situation as well as on the release of quarterly earnings.

The market is currently in a cautious phase. If tensions do not escalate, consolidation is likely. However, if the situation intensifies, this calm may prove to be temporary, leading to more volatility.