Indian stock market: Is it wise to start accumulating stocks despite an escalation in India-Pakistan conflict? EXPLAINED

Indian stock market benchmarks, the Sensex and the Nifty 50, traded with decent gains on Monday, May 5, tracking positive global cues. Market sentiment was buoyed by rising expectations of a US-China trade deal and a strong US employment report. According to Reuters, nonfarm payrolls increased by 1,77,000 jobs in April, while the unemployment rate held steady at 4.2 per cent.

Healthy domestic macroeconomic indicators, a decline in crude oil prices, a weaker US dollar, and sustained foreign capital inflows are the additional tailwinds for the domestic market.

The Sensex closed with a gain of 295 points, or 0.37 per cent, at 80,796.84, while the Nifty 50 settled at 24,461.15, up 114 points, or 0.47 per cent. The BSE Midcap jumped 1.45 per cent, while the Smallcap index climbed 1.23 per cent.

Why is the Indian stock market rising today?

1. Macro boost: India sees record GST revenue in April

Market sentiment got a boost after India’s goods and services tax (GST) revenue rose nearly 13 per cent higher to a new peak of ₹2.37 lakh crore. The GST mop-up was ₹2.10 lakh crore in April 2024 – the second highest collection ever since GST was rolled out in July 2017.

Experts highlight that the record GST collection demonstrates the resilience of the Indian economy amid global uncertainties. It also reflects a healthy recovery and growth, which is a significant positive for the stock market.

2. US-China trade talks underpin market sentiment

Expectations of a trade deal between the world's two largest economies—the US and China—have aggravated investors' risk appetites. As media reports indicated, US President Donald Trump said he is open to reducing tariffs on China, acknowledging that current rates have effectively halted trade between the two countries.

“At some point, I’m going to lower them, because otherwise, you could never do business with them, and they want to do business very much,” Trump said in an interview taped Friday and aired Sunday on NBC’s ‘Meet the Press’ with Kristen Welker.

3. Crude oil prices crash

A steep fall in crude oil prices also influenced market sentiment. Oil prices fell 4 per cent, or more than $2 per barrel, in early trade on Monday as OPEC+ indicated oil output hikes, raising concerns about a supply glut.

As India is one of the largest importers of crude oil, a fall in its price lowers India's import bill, reduces the current account deficit (CAD) and lowers inflation.

4. Rupee's rise, dollar's weakness

The Indian rupee opened 0.1 per cent higher at 84.45 per US dollar against the previous close of 84.58, according to Reuters.

The dollar index declined amid growing optimism surrounding the China-US trade relations.

“The steep decline in the dollar index from 111 on 11th January to 99 recently continues to be a strong tailwind for the Indian stock market,” said VK Vijayakumar, Chief Investment Strategist, Geojit Investments.

5. FIIS on a buying spree

Foreign institutional investors (FIIS) have been on a buying spree of Indian stocks in the cash segment over the last few sessions, underpinning market sentiment.

India's healthy growth outlook amid global turmoil, stable Q4 earnings and weakness in the US dollar have attracted FIIS to its stock market.

"The reversal in FII strategy in India from selling to buying continued for the week ending 2nd May. During the last 12 trading days, FIIS have been a sustained buyer in the cash market, having bought equities for ₹40,145 crore cumulatively. This is a major pivot in FII's strategy. And this will impart resilience to the market," said Vijayakumar.

What are the key risks for the market?

Despite several tailwinds, the Indian stock market has not seen any remarkable gains over the last several days. Considering Monday's high, the Nifty 50 has risen 0.75 per cent in four days.

The biggest factor limiting the domestic market's gains is an escalation in the India-Pakistan conflict.

After the Pahalgam terror attack, India has taken several steps against Pakistan, including the suspension of the Indus Waters Treaty, the imposition of a complete ban on all imports from Pakistan, the suspension of all postal services from the country and barring its ships from entering Indian ports.

"The key concern now is India’s potential retaliatory response to the recent terrorist attack and its possible fallout. This geopolitical uncertainty is likely to weigh on investor sentiment and could limit the FII-driven market rally. For now, tensions on the India-Pakistan front appear to be overshadowing the otherwise supportive factors for the market," said Vijayakumar.

The market is also awaiting greater clarity on the potential US-China trade deal and looking for stronger signals to confirm that the US economy is unlikely to enter a prolonged recession.

The US GDP contracted at a 0.3 per cent annualised rate in the first quarter of the current calendar year. US manufacturing contracted for a second straight month in April. The ISM's manufacturing PMI dropped to a five-month low of 48.7 in April from 49.0 in March.

Should you accumulate stocks amid an escalation in the India-Pakistan conflict?

Even though experts highlight heightened uncertainty on the India-Pakistan front, they recommend accumulating quality large-caps at this juncture.

"We expect the domestic markets to remain firm in the short term. However, the small and mid-cap segments may underperform the large-cap segment as retail investors’ participation seems to be quite weak due to fear on account of tensions on the border," said G Chokkalingam, the founder and head of research at Equinomics Research Private Limited.

"Till intense tensions on the border moderate, we suggest some tilt towards large caps, especially Sensex and Nifty 50 stocks. Of course, if there is any possible major conflict or war with a neighbour, then the whole market, including the large cap segment, may see a substantial fall," Chokkalingam said.

According to Amit Jain, the co-founder of Ashika Global Family Office Services, investors should stay anchored to fundamentals.

"It’s a time to avoid excessive risk, focus on quality balance sheets, and prioritise sectors with minimal direct exposure to global trade battles, such as domestic banking, FMCG, and capital goods," said Jain.

Ajit Mishra, SVP of research at Religare Broking, suggests buying on dips at this juncture.

"Looking at the present scenario, it is advisable to maintain a positive approach with a 'buy on dips' strategy and a preference for hedged positions in the index. Meanwhile, selective stock-picking opportunities continue to emerge with sector-specific preferences. Hence, the focus should be on identifying stocks with favourable risk-reward setups," said Mishra.

Read all market-related news here

Read more stories by Nishant Kumar

Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.