The rupee and stocks extended losses after the Indian Army said it launched military raids into a Pakistan-controlled part of Kashmir to destroy camps hosting terrorists. India’s currency weakened as much as 0.5 percent, the most since May 18, to 64.8975 per dollar, before closing at 64.89 in Mumbai. State-run lenders sold dollars, probably on behalf of the central bank, as the rupee extended declines, two Mumbai-based traders said. The S&P BSE Sensex index of shares closed 0.7 percent lower, while benchmark 10-year sovereign bonds reversed gains.
“Investors across asset classes got a bit nervous,” Soumen Chatterjee, Kolkata-based head of research at Guiness Securities Ltd., said by phone. “Increasing tensions across the border will create uncertainty.”
The operation was conducted “very recently,” in the Nowshera sector, Ashok Narula, a spokesman, told reporters in New Delhi. Pakistan denied the action took place.
Geopolitical concerns in Asia are on the rise, led by tensions in the Korean peninsula. South Korea’s military fired warning shots at an unidentified object flying across the military demarcation line on Tuesday, days after North Korea conducted another missile test.
India’s military action comes roughly three weeks after New Delhi blamed Pakistani military personnel for killing and mutilating Indian soldiers in the disputed region of Kashmir, which is claimed in full and ruled in part by both countries.
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Tensions have remained high between the nuclear-armed, South Asian neighbors since India said in September last year that it launched military raids across the so-called Line of Control that divides Kashmir. Pakistan denied the raids occurred.
Indian sovereign bonds fell, with the yield on the new 10-year benchmark notes rising one basis point to close at 6.67 percent.
Most Asian emerging currencies and stocks were already trading lower on Tuesday after a suicide bombing killed 22 people in the northern city of Manchester last night. Sentiment was weaker also on rising U.S. political risk following a report that President Donald Trump sought to push back against an FBI investigation into possible collusion between his campaign and the Russian government.
India’s rupee has rallied 4.7 percent this year, boosted by foreign purchases of Indian stocks and bonds.
“The kneejerk reaction was mainly on the back of the news of Pakistan strikes,” said Ashtosh Raina, Mumbai-based head of foreign-exchange trading at HDFC Bank Ltd. “Hopefully, the rupee will recover tomorrow.”