Karachi, May 7, 2025 — The Pakistan Stock Exchange (PSX) experienced heightened volatility on Tuesday as early gains failed to hold, with the benchmark KSE-100 index closing down by over 500 points. The drop comes despite a surprise interest rate cut by the State Bank of Pakistan (SBP), indicating that geopolitical concerns continue to weigh heavily on investor sentiment.
At the start of trading, the market showed signs of recovery. The KSE-100 index jumped by 990.87 points, or 0.87 percent, reaching 115,093.10 just after 10:00 a.m. However, the rally proved short-lived. By midday, the index had pared some of those gains, settling at 114,723.98. Ultimately, it fell sharply in the second half of the session, closing at 113,568.50 — a decline of 533.73 points or 0.47 percent from the previous close of 114,102.23.
The downward trend occurred despite the SBP’s unexpected decision to cut the policy rate by 100 basis points to 11 percent on Monday. This move had initially buoyed market expectations, especially after speculation that ongoing regional tensions might prompt the central bank to maintain the status quo.
Analysts had mixed reactions to the day’s market performance. Awais Ashraf, Director of Research at AKD Securities, noted that the initial optimism from the interest rate cut was overshadowed by deteriorating geopolitical conditions. “The market lost its momentum amid concerns over border tensions with India, which overshadowed the earlier boost from the rate cut,” Ashraf explained.
Recent developments in the region have heightened investor anxiety. Tensions between Pakistan and India have escalated following the April 22 attack in Pahalgam, Kashmir, which resulted in the deaths of 26 individuals, primarily tourists. India has suggested that the attackers had cross-border support, a claim that Pakistan has categorically denied, calling instead for an independent international investigation.
The increased rhetoric and warnings of possible military action have made investors wary, prompting a defensive stance in the equity markets. Despite these fears, Ashraf added a note of caution against overreaction. “We believe the likelihood of a full-scale war remains low, constrained by the nuclear deterrence factor. However, even minor escalations can deter foreign investment and rattle market confidence.”
Samiullah Tariq, Head of Research at Pak Kuwait Investment Company Ltd., pointed out that the SBP’s aggressive rate cut initially boosted investor morale. “The cut was higher than market expectations and typically would have supported equities, especially in rate-sensitive sectors like cement and construction,” he said.
Monday’s market activity had also shown extreme volatility. Topline Securities reported that the index had plunged over 1,000 points in early trade before recovering later in the day, largely supported by renewed interest in the cement sector ahead of the monetary policy announcement.
Meanwhile, international credit rating agency Moody’s issued a cautionary statement, warning that prolonged tensions between India and Pakistan could undermine Pakistan’s economic recovery. The agency highlighted that persistent uncertainty could limit access to foreign financing and disrupt efforts at macroeconomic stabilization. Moody’s added that while India’s broader macroeconomic outlook remains stable, increased defence expenditure could impact its fiscal consolidation trajectory.
In sum, the PSX’s sharp reversal on Tuesday underscores how vulnerable the local equity market remains to both domestic policy signals and external geopolitical risks. While monetary easing provided temporary optimism, regional instability continues to shape the market’s trajectory in the near term.