A swift return of the captive pilot would help cool things down. Indian Prime Minister Narendra Modi is facing re-election in polls which could be tightly contested and must be held by May. His right-wing Hindu nationalist party was already under pressure to show a strong response to the Kashmir bombing. Meanwhile, Prime Minister Imran Khan has called for talks but cooperation from the country''s powerful military will be essential, too.
Relations have been worse, and war avoided. The 2001 crisis and Mumbai attacks in 2008 are two examples cited by Gareth Leather, senior economist at research outfit Capital Economics. This time around Pakistan faces a balance of payments crisis and will likely need another lifeline from the International Monetary Fund. Meanwhile, any serious protracted fight between the two nations may force foreign direct investors to rethink their interest in India, now the world''s fastest growing large economy.
In the markets, though, there is some level-headedness. Benchmark indices in both countries closed down just about 0.3 percent on Wednesday. India''s 10-year bond yield rose slightly to 7.67 percent. The local volatility index jumped 10 percent, not wild compared to recent moves. For investors, this is all high-risk game theory, but they at least seem to be giving peace a chance.
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- India''s Nifty 50 Index closed lower 0.26 percent and Pakistan''s benchmark KSE 100 Index fell 0.33 percent, both recovering from sharper declines earlier in the day.