Ceasefire deal fuels stock market optimism in India and Pakistan

Stocks in Pakistan and India surged on Monday following a ceasefire agreement between the two nuclear-armed neighbors on Saturday. Pakistan’s KSE-30 Index jumped by 9.2%, while India’s Nifty 500 Index soared as much as 3%.

On Friday, investors got nervous as the Nifty dropped more than 1%, its steepest fall in over a month. The Indian rupee was also one of Asia’s worst performers last week.

India’s bond yields surged as risk premiums widened, although debt purchases by the Reserve Bank of India helped mitigate the drop. Pakistan’s KSE-30 Index slid 9% since the April 22 attack in Kashmir, which prompted India to retaliate.

Pakistan and Indian stocks soar following ceasefire agreement

Pakistan’s stock benchmark, the KSE-30 Index, soared more than 9.2%, the most since 2008, triggering a one-hour halt in trading. The NSE Nifty 50 Index also surged as much as 3% in Mumbai.

Stocks in both countries jumped after a ceasefire deal between the two nuclear-armed nations on Saturday.

Ali Raza, head of international trading at BMA Capital Management Ltd., argued that investor focus is expected to return to accelerating economic reforms following the easing of war tensions. 

“Given how quickly things were escalating last week, the developments over the weekend are a move in the positive direction. The focus could return to the Indian growth story.”

-Vivek Dhawan, Fund Manager at Candriam.

Dhawan also noted that India’s positive economic signals suggest that foreign investors, who had been on a near 3-week buying streak until Friday, may resume inflows. He also sees increased inflows from prospects of an early U.S. trade deal, ample liquidity, and anticipated interest rate cuts.

The fund manager also argued that traders in Pakistan expect the country’s economic reforms to regain focus as border tensions had exceeded a surprise interest-rate cut by the State Bank of Pakistan and prospects for additional IMF funding. The IMF approved $1 billion on Friday in immediate disbursement and a new $1.4 billion plan for climate resilience.

Raza from BMA Capital Management also noted that the SBP’s recent cut, previously overshadowed, and dual loan disbursement by the IMF, will come back into play after easing war tensions.

The Indian rupee surged by 0.9% versus the dollar in the offshore market. The country’s bonds and currency markets are closed on Monday for a public holiday. The National Stock Exchange of India Ltd.’s volatility gauge also dropped to 17.2, its lowest since April 30. The top five traded Nifty 50 options were all bullish, with May 24,600-rupee calls expiring Thursday clocking the highest volume.

The threat of renewed war tensions still looms, 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. It was also alleged that a top Indian diplomat said that Pakistan violated the truce just hours after it was declared, a claim Pakistan has denied. 

Tejas Shah, head of derivatives trading at Equirus Securities, believes there is still some uncertainty around the pause in fighting. He also argued that language from both sides will be important to monitor. Shar acknowledged that some investors may use the relief rally to reduce positions.

India and Pakistan commit to a ceasefire agreement

The Indian Army said on Monday that the Line of Control (LoC) and border area remained peaceful in the wake of the ceasefire agreement. The army noted that Sunday night remained peaceful across Jammu, Kashmir, and other areas along the international border, marking the first calm night recently.

Although explosions rocked several parts of Kashmir hours after the truce was announced on Saturday, both countries have reiterated their commitment to the agreement.

U.S. President Donald Trump acknowledged that a night of talks mediated by Washington helped secure the deal after the White House received alarming intelligence on the conflict, according to U.S. sources. The President mentioned he was proud of the country’s role in ending the fighting, although India has downplayed U.S. involvement in the talks.

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