India Terror Attack May Prompt a ‘Knee-Jerk’ Market Reaction

(Bloomberg) -- The most serious attack to occur since Prime Minister Narendra Modi came to power in 2014 will add to the political uncertainty ahead of national elections this year and may cause at least a temporary reaction in the markets.

At least 40 security personnel died in the attack, which Modi described as “despicable” in a tweet on Thursday evening. Jaish-e-Mohammed, a United Nations-listed terror organization, claimed responsibility, according to Asian News International.

READ: Kashmir Deaths Climb to 40 in Worst India Attack Under Modi

India’s relatively strong economic growth, supportive central bank and tame inflation are likely to keep investors calm over the long-term unless the situation escalates significantly, analysts said. Also, they said, investors are familiar enough with the long-running dispute in Kashmir that they are unlikely to panic.

India’s NSE Nifty 50 stock index is down 1.5 percent so far this year, and in recent days has fallen below both its 50-day and 200-day moving averages. The currency has weakened over the same time amid potential for more rate cuts, moving from under 70 per dollar to 71.165/USD as of about 10 a.m. Hong Kong time Friday.

Here is what analysts are saying about the terror attack’s potential market impact:

Sumitomo Mitsui Asset Management Co. (Tetsuji Sano)

"The attack in Kashmir could temporarily lift credit-default swaps and possibly put selling pressure on the rupee to push toward 72 in the near-term, but the impact may not last too long as underlying economic fundamentals in India remain strong."

"The latest attack in Kashmir isn’t seen hurting its fundamentals or increasing political risk in the country."

AMP Capital Investors Ltd. (Shane Oliver)

"Expect a short-term knee-jerk negative reaction. Then the market will move on because they rarely have a significant macroeconomic impact."

"For Modi - it depends how he handles it. But such disasters are normally positive for incumbent leaders."

Rakuten Securities Inc. (Nick Twidale)

“This attack makes Modi’s political situation more precarious, there will be calls to deal with this in a variety of different ways. I think we’ll see a decent depreciation in the rupee today -- the move should see it regain levels near 71.80 and then it’s clean air all the way back to 74" against the U.S. dollar.

“And with the always difficult political situation between India and Pakistan a major factor, we will only get further uncertainty across the markets which could see that attraction of India’s markets fall sharply in the global community.”

“The usual first reaction will be a rally in bonds, however this may be short lived. We could see counter strikes etc then further volatility across all markets is virtually guaranteed -- this could sharply depreciate foreign investment appetite.”

Target Investing (Sameer Kalra)

The attack would have a “slight impact” and thus it won’t alter the bull case.

"It will create another upside in when the reply actually gets executed by the government. Stronger reply to such attacks is rewarded by the markets."

Continuum Economics (Charu Chanana)

"I don’t expect to see a big impact on markets -- whether it’s currency, bonds or stocks -- from this story. It is big but the focus for investors have been more on the central bank and inflation, monetary policy and I don’t see that changing much for now."

"Kashmir has always been a contentious region and it’s not the first time attacks have happened. Investors are aware of this so unless the scale of incidents become significantly higher, I don’t expect to see a major impact on markets or outflows."

--With assistance from Chikafumi Hodo.

To contact the reporters on this story: Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net;Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Joanna Ossinger, Karthikeyan Sundaram

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