The Indo-Pakistan conflict is one of our time’s longest and most dangerous geopolitical confrontations. Its origins go back to 1947 when British India was divided into two independent countries: India and Pakistan. The main cause of discord was a dispute over the Jammu and Kashmir region, whose Muslim majority was combined with a Hindu ruler who decided to join India.
Since then, India and Pakistan have experienced three full-scale wars (1947, 1965, 1971) and many armed skirmishes. Particularly troubling that both countries are nuclear powers, which dramatically increases the risks to global stability.
Among the main causes of conflict:
- Dispute over ownership of Kashmir.
- Religious tensions (Hinduism in India and Islam in Pakistan).
- External players’ interference increases tensions (e.g., the United States, China, Russia).
- Issues of national identity and territorial integrity.
To date, the conflict continues to simmer in the form of regular border shootings, terrorist attacks, and diplomatic scandals.
The conflict may now flare up with renewed vigor. India has blocked the flow of the Indus River towards Pakistan by closing all four sluices that control the water flow through dams and canals. Pakistan had earlier said it would consider any attempt by India to stop or divert the flow of Indus River water as an act of war. Pakistan depends on water from the Indus Basin for more than 80% of its agriculture and about a third of its hydropower.
Pakistan closed its airspace to India and declared persona non grata Indian defense, navy, and aviation advisers. In turn, New Delhi said it was halting the issuance of visas to Pakistanis and canceling those already issued. Relations between the countries escalated against the backdrop of the April 22, 2025, terrorist attack in India’s allied territory of Jammu and Kashmir.
Potential Impact on Financial Markets in the Event of a Full-Scale War
Escalation of the conflict to the level of a full-scale war between India and Pakistan would have wide-ranging implications not only for the South Asian region but also for global financial markets. Let us consider the key impact scenarios:
1. Foreign Exchange Market (Forex)
- The Indian Rupee (INR) and Pakistani Rupee (PKR) would face a sharp fall.
- Increased demand for safe havens — currencies such as the Japanese Yen (JPY), Swiss Franc (CHF), and US Dollar (USD) — traditionally increases during periods of geopolitical turmoil.
- Falling emerging market currencies in the region (e.g., Brazilian real, Turkish lira, South African rand) due to the “risk sell-off” effect.
2. Stock indices
- Indian Sensex and Nifty 50 will show a sharp fall amid investor flight.
- Global markets will also feel the blow. Asian markets—the Nikkei 225 (JP225), Hang Seng (HK50), and Kospi (South Korea)—will suffer foremost.
- If China (an ally of Pakistan) or the US (a potential supporter of India) gets involved, we can expect a wave of corrections in global markets, including the S&P 500 and Nasdaq.
3. Gold and Commodity Markets
- Gold (XAU/USD) may rise sharply as investors seek protection from volatility.
- Oil prices could rise, especially if escalation affects transportation routes across the Indian Ocean and Arabian Sea.
- Silver and platinum may also gain support as alternative value storage assets.
4. Additional Aspects
- Global supply chains will be affected, especially in IT (India is one of the largest outsourcing centers) and textiles (Pakistan is a major cotton producer).
- Risks of stagflation in Asian countries amid rising energy and commodity prices.
- Increased demand for US and German government bonds as safe assets.
- Asia would be disproportionately affected due to its geographical proximity and economic ties to India and Pakistan. Neighboring countries could experience a spillover effect, including refugee flows, disruptions to trade, and increased security concerns. The impact on regional trade and investment would be substantial, potentially affecting regional economic growth.
Rising of Geopolitical Instability
A full-scale war between India and Pakistan would go far beyond South Asia, affecting global currencies, stock indices, and gold prices. With growing geopolitical instability, investors should closely monitor the dynamics of events in the region, diversify portfolios, and consider defensive assets as part of their investment strategy.