Despite the recent rise of geopolitical tensions with the neighboring country, Pakistan, investors remain bullish on India’s long-term economic prospects. Even amid tensions, India ETFs like iShares India 50 ETF (INDY Quick QuoteINDY - Free Report) have remained flat.

Optimism surrounding structural reforms, upbeat quarterly earnings and strong macroeconomic fundamentals is probably making up for the potential losses from rising geopolitical tensions.

Markets Resilient Amid Geopolitical Tensions

Indian financial markets showed resilience after the country launched military strikes on targets in Pakistan-controlled territory early Wednesday. Investor reaction was muted, with benchmark indices—the Nifty 50 and BSE Sensex—trading nearly flat.

This indicated limited concern among investors about an immediate escalation. India’s operation followed a militant attack last month in Pahalgam, Jammu and Kashmir, in which 26 people were killed.

Support From Economic Fundamentals and Reforms

“Structural reforms, resilient domestic demand and strong macro fundamentals continue to offer a compelling case,” said Mohit Mirpuri, equity fund manager at SGMC Capital. He added that while some investors may pause momentarily, India remains a key emerging market allocation.

Positive Momentum in Trade Talks

Investor sentiment is also being bolstered by progress on international trade. India finalized a free trade agreement with the United Kingdom on May 6, 2025, and is expected to become one of the first countries in the region to finalize a bilateral deal with the United States—possibly before Q3 2025, according to Radhika Rao, senior economist at DBS Bank, as quoted on CNBC.

Short-Term Volatility Likely, Long-Term Trajectory Intact

Short-term volatility remains possible, depending on the conflict’s trajectory. Should the situation intensify, investor confidence may be dampened. However, if India-Pakistan tensions are kept in check, major disruptions to the markets seem unlikely.

Indian companies have delivered a better-than-expected earnings performance so far for the March 2025 quarter. However, forward earnings downgrades continue to outdo upgrades, indicating lingering caution despite strong numbers, brokerage Motilal Oswal said in its interim review of the Q4FY25 earnings season, as quoted on Economic Times.Global macro conditions and trade tensions are likely to keep markets volatile. If a war-like scenario emerges, upcoming earnings may come under pressure.

India ETFs in Focus

Against this backdrop, investors should monitor India-based exchange-traded funds (ETFs) like iShares MSCI India ETF (INDA Quick QuoteINDA - Free Report) , WisdomTree India Earnings Fund (EPI Quick QuoteEPI - Free Report) , Franklin FTSE India ETF (FLIN Quick QuoteFLIN - Free Report) , and The India Internet ETF (INQQ Quick QuoteINQQ - Free Report) closely.