India-Pakistan tensions have resurfaced sharply in 2025 following the Pahalgam terror attack and intensified border firings along the Line of Control (LoC). These developments have once again triggered concerns about regional instability and potential military escalation. As tensions rise, investors across the globe closely monitor the impact on currency markets. The forex market reacts swiftly to any signs of geopolitical risk, and India-Pakistan tensions are no exception.
The global forex market, which thrives on predictability and economic stability, is particularly sensitive to war threats between two nuclear-armed nations. When these tensions escalate, traders witness immediate changes in exchange rates, capital flows, and safe-haven asset demand. Understanding how the impact of India-Pakistan conflict on forex unfolds helps traders and policymakers manage risk and maintain stability.
How Forex Markets React to Geopolitical Risk in South Asia
The moment India-Pakistan tensions escalate, the forex market reflects this instability. Currency volatility in geopolitical crises increases as uncertainty drives traders to reassess risk exposure. As a result, the Indian Rupee (INR) and Pakistani Rupee (PKR) often experience immediate depreciation.
This trend occurs because geopolitical risk and forex market reactions are deeply interconnected. When political conflicts threaten economic activity, foreign investors move their capital out of affected regions. The heightened uncertainty surrounding the India-Pakistan conflict triggers this capital flight, weakening local currencies and strengthening global safe-haven assets.
Key reactions in forex markets include:
- Depreciation of INR and PKR
- Strengthening of safe-haven currencies like the USD, CHF, and JPY
- Increased volatility in emerging market currencies
- Risk-averse trading strategies among institutional investors
These reactions emphasize how safe-haven currency demand intensifies during India-Pakistan tensions.
INR and PKR Under Pressure During Conflict Escalation
When violence breaks out or rhetoric escalates between India and Pakistan, both nations’ currencies suffer. The Indian Rupee faces consistent pressure during such periods. After the Pahalgam attack in April 2025, the INR fell by over 1.2% against the U.S. dollar in three trading sessions. Border firings further accelerated the decline.
Several reasons contribute to INR weakness during conflict:
- India’s reliance on oil imports means any rise in Brent crude prices worsens the trade balance.
- Foreign investors sell off Indian government bonds and equities due to increased uncertainty.
- The Reserve Bank of India (RBI) may intervene in forex markets, using reserves to stabilize the currency.
Meanwhile, the Pakistani Rupee, already burdened by inflation and external debt, reacts more violently. The PKR saw intraday losses of over 2% in the wake of recent LoC flare-ups. With limited forex reserves, Pakistan’s central bank has fewer tools to defend the currency, leaving it vulnerable during geopolitical crises.
Currency volatility in geopolitical crises becomes a recurring pattern for INR and PKR. In both cases, central banks face a dilemma: defend the currency or preserve forex reserves.
Safe-Haven Currency Demand Surges Globally
Whenever India-Pakistan tensions escalate, global demand for safe-haven currencies increases. Traders seek refuge in assets that hold their value in uncertain times. Among these, the U.S. Dollar (USD), Swiss Franc (CHF), and Japanese Yen (JPY) are the most preferred.
Here’s why they stand out:
- The USD is backed by the world’s largest and most liquid economy.
- The CHF benefits from Switzerland’s political neutrality and economic stability.
- The JPY is historically favored during Asian geopolitical conflicts.
Following the Pahalgam incident, USD/INR rose above 84.00 for the first time in three months. CHF/INR and JPY/INR also gained significantly, reflecting the shift toward low-risk currency holdings. This rise in safe-haven currency demand highlights the forex market’s immediate reaction to India-Pakistan tensions.
Investors also move into safe-haven assets such as:
- Gold
- U.S. Treasury bonds
- Swiss government securities
These inflows often lead to temporary appreciation of the corresponding currencies, further driving the impact of India-Pakistan conflict on forex.
Impact on Emerging Markets and Regional Currencies
The India-Pakistan conflict does not affect only their domestic currencies. It often sparks a regional risk-off sentiment that impacts other Asian and emerging market currencies. This broad-based impact is rooted in how the geopolitical risk and forex market linkages spread through interconnected economies.
Examples of affected currencies include:
- Bangladeshi Taka (BDT)
- Sri Lankan Rupee (LKR)
- Indonesian Rupiah (IDR)
- Thai Baht (THB)
Emerging market funds often face redemptions during regional instability. In 2019, after the Balakot airstrikes, Asian currencies weakened across the board. A similar pattern emerged following the 2025 Pahalgam attack, with the BDT and LKR both falling against the dollar.
This widespread regional reaction stems from:
- Reduced investor confidence in South Asia
- Concerns about trade disruptions
- Rising oil and commodity prices
As safe-haven currency demand increases, investors exit positions in riskier emerging markets. This pattern reinforces how India-Pakistan tensions create broader currency volatility in geopolitical crises.
How Oil Prices and Inflation Add Pressure on Forex
The forex market closely tracks oil prices during India-Pakistan tensions. Both countries are major oil importers, and a conflict-induced spike in oil prices significantly impacts their current account balances. Rising Brent crude prices mean:
- Higher import costs for India and Pakistan
- Increased inflationary pressures
- Widening trade deficits
- Further weakening of INR and PKR
For example, in May 2025, after the Pahalgam incident, oil prices jumped 4% amid fears of conflict near key shipping lanes. This rise hurt the INR’s value even further. Forex traders now price in the twin risks of geopolitical instability and oil-driven inflation.
This combination of geopolitical risk and forex market reaction leads to complex monetary policy decisions. Central banks might raise interest rates to contain inflation, even at the cost of slower growth.
Central Bank Intervention and Currency Stabilization Measures
The Reserve Bank of India and the State Bank of Pakistan often intervene in forex markets during periods of conflict. Their primary goal is to prevent excessive depreciation and stabilize currency expectations. Measures taken include:
- Direct USD selling from reserves
- Interest rate hikes
- Forward guidance and market communication
- Bilateral currency swap arrangements
Despite these efforts, persistent India-Pakistan tensions often limit the effectiveness of interventions. If confidence is low, even substantial forex reserve usage may fail to reverse negative sentiment.
In April 2025, the RBI reportedly sold nearly $2 billion worth of USD to cap the INR’s fall. However, INR depreciation persisted due to the overwhelming geopolitical uncertainty. This underscores how geopolitical risk and forex market dynamics sometimes overpower central bank action.
Algorithmic Trading and Forex Volatility in Conflict
Modern forex markets are increasingly driven by algorithms. High-frequency trading systems respond instantly to news alerts, social media trends, and geopolitical keywords. During India-Pakistan tensions, this automated activity accelerates volatility.
Traders notice sudden spikes in:
- Bid-ask spreads
- Intraday price swings
- Currency correlations shifting rapidly
For instance, within minutes of the Pahalgam news breaking, USD/INR surged as algorithms detected the term “terror attack” and initiated programmed trades. This rapid movement often leaves manual traders lagging behind and increases short-term uncertainty.
This dynamic highlights how safe-haven currency demand and real-time news sentiment interact powerfully in today’s forex market.
Long-Term Forex Impact of a Full-Scale War
If India-Pakistan tensions escalate into a full military conflict, the long-term forex impact could be severe. Consequences include:
- Prolonged currency depreciation for INR and PKR
- Credit rating downgrades by global agencies
- Capital outflows and reduced FDI
- Structural trade imbalances
In such a scenario, the geopolitical risk and forex market interplay would result in new highs for USD/INR and USD/PKR. The fear of sustained war spending and economic disruption would amplify currency volatility in geopolitical crises.
Additionally, conflict in South Asia could affect:
- China’s regional trade routes and currency planning
- Gulf oil shipments and associated currency pair movements (e.g., USD/AED)
- Global economic forecasts, affecting USD, EUR, and GBP
This scenario could trigger a broader reshuffling of global capital, driven by persistent safe-haven currency demand and deepening global risk aversion.
Conclusion
India-Pakistan tensions remain one of the most potent sources of geopolitical risk in Asia. As seen in recent events like the Pahalgam attack and increased border firings, the impact on the global forex market is immediate and far-reaching.
Traders witness falling INR and PKR values, rising safe-haven currency demand, and increased volatility across emerging market currencies. Oil price spikes, central bank interventions, and algorithmic trading only add to the complexity. These dynamics demonstrate how the impact of India-Pakistan conflict on forex is both acute and persistent.
In 2025’s highly connected world, a regional flare-up between India and Pakistan doesn’t just move local markets—it shakes currency valuations from Wall Street to Tokyo. Understanding this relationship allows traders, policymakers, and investors to navigate geopolitical crises with greater clarity and preparedness.
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This post is originally published on EDGE-FOREX.
