By Garvita Y

Two military crises, one surprising market reaction

In recent months, the world has seen two major regional conflicts unfold—Israel and Iran exchanging missile strikes in June 2025, and India launching Operation Sindoor against Pakistan in May following a terrorist attack in Kashmir. Both incidents involved military escalation and generated intense media coverage. Yet the market response to each was strikingly different.

Global financial markets reacted with familiar alarm to the Israel-Iran confrontation. The Dow Jones Industrial Average plunged by over 700 points. Oil prices surged past $92 a barrel before falling back, and the Volatility Index (VIX), often called Wall Street’s “fear gauge,” spiked 18% in a single day. Investors temporarily fled to traditional safe havens like gold and the US dollar. But within days, calm returned. Markets began climbing again as fears of escalation eased, and oil prices normalized.

In contrast, India’s Operation Sindoor drew an almost muted reaction from the country’s financial markets. The Sensex fell modestly on the day of the announcement but quickly recovered, ending the week 2.3% higher. Bond yields remained largely stable, and the rupee showed no significant movement against the dollar. In fact, foreign institutional investors (FIIs) continued to pour capital into Indian equities, investing over ₹22,000 crore in May 2025 alone.

Markets are learning to price war differently

This contrast is not merely a quirk of timing or geography, it reflects something deeper—a shift in the way modern markets interpret military risk. Investors are no longer reacting uniformly to every geopolitical flare-up. Instead, they are drawing clearer distinctions between limited, localized conflicts and systemic threats to global economic stability.

India’s experience illustrates this evolution. Unlike previous instances when even the threat of border tensions could trigger capital flight and currency depreciation—Indian markets now show signs of resilience. During previous episodes like the 2016 surgical strikes or the 2019 Balakot airstrikes, initial market reactions were sharper, and recovery took longer. This time however, the market’s calm suggested a growing belief that short-term military operations would not derail long-term economic fundamentals.

Domestic structure shields Indian markets

Part of this confidence comes from structural economic strength. India’s GDP is heavily driven by domestic consumption, which accounts for over 60% of total output. This inward-looking demand base shields the economy from external volatility, including regional conflicts. Furthermore, key sectors such as information technology, manufacturing, and financial services continue to operate with minimal disruption during periods of military tension. These sectors, critical to both earnings and employment, offer a form of built-in insulation against geopolitical shocks.

Investors are becoming more selective in their panic

Beyond domestic fundamentals, global investor behavior is also changing. Evidence from recent conflicts suggests that markets are becoming more selective in their panic. The Russia-Ukraine war in 2022 triggered a severe and sustained reaction as stock markets across Europe plunged, the Russian ruble collapsed, and global commodity prices soared. However, smaller or more contained conflicts like the Armenia-Azerbaijan clashes in 2023 elicited little to no movement in global indices. Even the Iran-Israel conflict, while initially disruptive, saw markets bounce back quickly once it became clear that escalation would be limited.

This changing pattern points to a deeper transformation in the logic of global capital. In the past, emerging markets like India were often viewed as fragile as they were usually prone to capital outflows at the first sign of political or military instability. Today, investors appear more nuanced in their approach. Sophisticated portfolio managers and institutional funds are increasingly assessing the type, scale, and likely economic impact of each conflict, rather than reacting to headlines alone.

Diplomatic balance bolsters investor confidence

India’s foreign policy strategy may also be contributing to this perception of stability. By refusing to align with either bloc during recent international conflicts, such as its decision not to join the Shanghai Cooperation Organisation’s condemnation of Israel, India has carved out a position of diplomatic balance. This signals to markets that the country is unlikely to become entangled in unpredictable alliances or dragged into broader military confrontations. That, in turn, reduces perceived geopolitical risk.

Bond markets confirm India’s financial maturity

Bond markets offer further confirmation. Often considered a more reliable gauge of investor sentiment than equities, sovereign bond yields in India have remained steady throughout the military episode. This stands in contrast to traditional emerging-market behavior, where such conflicts typically result in sharp yield spikes and currency pressure. This reinforces the view that investors no longer see short-term security tensions as a threat to fiscal or macroeconomic stability.

A new global logic for conflict pricing

The broader implication of this in the new global order is that markets are beginning to differentiate between war and warfare. Full-scale invasions that disrupt global trade, energy supplies, or diplomatic alliances will still provoke market panic. Instead short, contained, or strategically calculated military actions—especially by states with robust domestic economies—are now viewed as manageable risks.

For India, this represents a subtle but significant shift in global perception. The country may still be classified as an emerging market, but its financial behavior increasingly resembles that of more mature economies. Its markets absorb shocks with greater composure, its bond yields remain stable, and its currency resists panic-driven volatility. This is not just a matter of size or growth rate, it reflects a deeper shift in how India is positioned in the global investment landscape.

As geopolitical tensions continue to rise around the world, this kind of resilience will only become more valuable. For global investors, India now offers not just a high-growth opportunity, but also a degree of conflict insulation that few other emerging economies can match. This ability to compartmentalize military tensions from market performance may well become a defining feature of successful economies in the years ahead.

Garvita Y is a Research Associate at Think Change Forum (www.thinkforum.org), an independent think tank based in New Delhi. She is also a final-year Bachelor of Science student in Economics & Finance at Ashoka University.

Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.