Moody’s Ratings on Monday (May 5, 2025) stated that continuous escalation of tensions between India and Pakistan is not expected to cause significant economic disruption in India. However, it could pose challenges for Islamabad by putting pressure on its forex reserves and impacting growth.
In a commentary titled ‘Escalating Pakistan-India tensions would weigh on Pakistan’s growth’, Moody’s mentioned that India’s economic activity is unlikely to be majorly affected as its economic relations with Pakistan are minimal (less than 0.5% of India’s total exports in 2024).
Pahalgam terror attack updates: May 5, 2025
On April 22, a terrorist attack in Pahalgam, Jammu & Kashmir, resulted in the death of 26 people. India has identified five terrorists, including three Pakistani nationals, responsible for the attack and has vowed to take action against them.
“Sustained escalation in tensions with India is likely to hinder Pakistan’s growth and impede the government’s fiscal consolidation efforts, delaying the country’s progress towards achieving macroeconomic stability,” Moody’s stated.
Pakistan’s macroeconomic conditions have been improving, with growth on the rise, inflation decreasing, and foreign-exchange reserves growing as the country continues to make progress in the IMF programme.
“Continued escalation in tensions could also affect Pakistan’s access to external financing and put pressure on its foreign-exchange reserves, which are currently below the required amount for meeting external debt payments in the coming years,” Moody’s added.
The Executive Board of the International Monetary Fund (IMF) is set to meet Pakistani officials on May 9 to evaluate a new $1.3 billion funding arrangement for Pakistan under its climate resilience loan programme. The board will also review the ongoing $7 billion bailout package.
Sources have indicated that India will urge global multilateral agencies, including the IMF, to reconsider the funds and loans provided to Pakistan.
Moody’s projected that India’s macroeconomic conditions will remain stable, supported by moderate yet significant growth levels, strong public investment, and robust private consumption.
“In a scenario of prolonged tensions, we do not foresee major disruptions to India’s economy due to limited economic ties with Pakistan. However, increased defense spending could impact India’s fiscal strength and slow down fiscal consolidation,” Moody’s noted.
Moody’s geopolitical risk assessment for Pakistan and India takes into account ongoing tensions that have occasionally resulted in minor military responses.
“We anticipate periodic flare-ups, as has been the case throughout the history of the two nations post-independence, but we do not expect a full-fledged, widespread military conflict,” the report stated.
Moody’s has assigned a ‘Caa2’ rating to Pakistan, indicating poor quality debt with high default risks. India, on the other hand, holds a ‘Baa3’ rating, the lowest investment-grade rating.
Referring to the April 22 attack, India has pledged severe punishment for those involved. Diplomatic relations between India and Pakistan have deteriorated following the terror attack, leading to various retaliatory measures.
Many global powers, including the U.S. and European Union, have urged both countries to de-escalate tensions while condemning the terror attack.
India’s exports to Pakistan in April-January 2024-25 amounted to $447.65 million, while imports were minimal at $0.42 million, mainly consisting of niche items. These imports stood at $2.88 million in 2023-24.
Published – May 05, 2025 05:46 pm IST
