Markets somersault, but how long will the relief rally last?

Markets show resilience with confidence buying leading to a major surge in equities across Asia. However, uncertainties around border tension and US tariff remain

By Nasrin Sultana

Published: May 12, 2025 05:52:10 PM IST

Image: Punit PARANJPE / AFP

It was a no surprise that the stock markets in India somersaulted on Monday, indicating return of confidence among investors riding on multiple positive triggers that took the benchmark indices to the best single-day gains since February 2021. Both the Sensex and Nifty surged nearly 4 percent intraday as geopolitical tensions along the India-Pakistan border seemed to be easing, while the US-China trade deal boosted further sentiments.

The Sensex ended at 82,429.90, gaining 2975.43 points or 3.74 percent. The 50-share index Nifty jumped 916.70 points or 3.82 percent to close at 24,924.70.

Equities in other Asian countries also rose celebrating the US-China deal to cut tariffs. Stocks in Hong Kong gained around 3 percent, while China’s benchmark index jumped over 1 percent.

The US and China have agreed to temporarily slash reciprocal tariffs in a deal that surpassed expectations as the world's two biggest economies seek to end a damaging trade war that has stoked fears of recession and roiled financial markets, according to Reuters. The US will cut extra tariffs it imposed on Chinese imports in April to 30 percent from 145 percent, and Chinese duties on US imports will fall to 10 percent from 125 percent, the two countries said. The new measures are effective for 90 days.

Since taking office in January, US President Donald Trump hiked the tariffs paid by US importers for goods from China to 145 percent, in addition to those he imposed on many Chinese goods during his first term and the duties levied by the Joe Biden administration.

According to Amar Ambani, executive director, Yes Securities, the Indian markets jumped partly due to the India-Pakistan ceasefire, but mainly on the news that the US and China have eased tariffs and that the talks have progressed well. “A 90-day window for a trade deal has lifted sentiment, with investors hoping the worst of the trade war is behind us,” he says.

In response to a terrorist attack in Pahalgam in April that claimed 26 lives, Indian armed forces conducted a successful 23-minute precision strike targeting nine locations in Pakistan-occupied Kashmir and Pakistan’s Punjab province on May 7. That led to a rise in hostilities between the two countries.

Worries and uncertainties remain

Even as the markets have shown resilience despite an ongoing border conflict, there are concerns if the rally will be sustained. Corporate earnings of the January-March quarter and steep valuations do not offer comfort to the markets rally.

“Q4FY25 earnings have been muted, while valuations of most sectors and stocks continue to be rich,” says Sanjeev Prasad, MD and co-head, Kotak Institutional Equities.

Also read: Will 2025 be a reality check for stock markets in India?

Indian markets have shown a fairly strong performance over the past month, despite elevated global and local uncertainty. Prasad reasons that the strong performance suggests that the markets were pricing in the rapid resolution of the ongoing trade and tariff issues with the US and geopolitical risks being under control.

“In this context, the de-escalation of the conflict between India and Pakistan may provide a limited boost to investor sentiment, with the risk-reward being precariously balanced between an improving macro, a weak earnings growth outlook, further earnings downgrades and elevated valuations,” he explains.

During such border conflicts in the past, Indian equity markets have not been negatively impacted significantly, but the economy was adversely affected, shows a data analysis by JM Financials. “However, the Indian economy now is far larger and more resilient than what it was during previous conflicts,” says Venkatesh Balasubramaniam, managing director and co-head, research, JM Financial.

Through most events, short-term movements (within three days of commencement of war) and longer-term movements (until the end of the war) have been in the range of 3 to 4 percent. The downside has been fairly limited during past key border skirmishes, shows the analysis.

During the 1962 Indo-China war, gross domestic product (GDP) saw a decline of 0.8 percent. Similar trends were seen post the Indo-Pak war in 1965, when the GDP declined 2.6 percent after a growth of 7.5 percent in the preceding year.

The 1999 Kargil war appears to be the only situation when the year of the war saw an increase in GDP growth to 8.9 percent as compared to 6.2 percent in 1998.

Institutional money flow

In April, both foreign institutional investors (FIIs) and domestic institutional investors (DIIs) were net buyers in the Indian equity markets to the tune of $530 million and $3.3 billion respectively. This marks the second consecutive month of FIIs buying after a long selling spree.

Also read: Can India address growth pangs in FY26?

Equity mutual inflows were steady at Rs26,900 crore in April, shows an Association of Mutual Funds in India (AMFI) data. Monthly systematic investment plan (SIP) inflows touched a record high of Rs26,600 crore, but SIP stoppage ratio also increased at an alarming rate. Monthly SIP inflows surged 31 percent year-on-year, showing a 3 percent rise from March.

SIP stoppage ratio is the SIP accounts discontinued versus new SIP accounts opened. In April, SIP stoppage ratio rose sharply to 298 percent due to a reconciliation exercise conducted by the Registrar and Transfer Agents and exchanges in compliance with a regulatory directive.

Bond markets

In the fixed income space, the US Treasury market has been seeing volatility with yields initially declining and then moving up sharply as a result of reciprocal tariffs imposed by the US on all countries. While yields on US Treasuries narrowed by 4 basis points (bps) over the month, the volatility around reciprocal tariffs and the uncertainty thereof led to swings in bond yields. Within a week, the yields rose to 4.5 percent from 4 percent levels after the announcement on tariffs by the US administration.

According to analysts at Axis Mutual Fund, the US will see its growth slowdown and the US Federal Reserve may lower interest rates by another 50 to 75 bps. However, the tariffs could lower growth, and this could mean a rate cut cycle of 75 to 100 bps, they say.

“India, too, will witness slower growth, but what holds the country in good stead is the limited goods exports to the US, but the services exports to the US is a higher component. The 90-day pause, while giving near-term respite, extends trade policy uncertainty, which could weigh down investment and consumption,” they add.