Trading floor at a Financial Services Ltd. office in Mumbai, India. Image Credit: Bloomberg

Mumbai: Indian stocks and the rupee bounced off the day’s lows as investors assessed the impact of the rising tensions between India and Pakistan against the backdrop of falling oil prices and recent buoyancy in emerging markets.

The S&P BSE Sensex Index initially dropped as much as 1.4 per cent and the rupee lost 0.5 per cent after the Pakistan army said Indian fighter jets violated an agreed border between the two nations. India later said its jets bombed a major terrorist camp in Pakistan in the worst escalation between the nuclear-armed rivals since 2001.

“The reason why you are not seeing such a negative sentiment in India is simply because rest of the emerging markets are doing fairly well, oil is lower and yields are lower,” said Ashish Vaidya, head of trading at DBS Bank Ltd. in Mumbai. “That’s providing support to the rupee.”

The outlook for emerging-market stocks has improved this year, thanks to growing optimism that the US and China will resolve their trade dispute and the dollar could weaken as the Federal Reserve pauses its rate hiking programme. Prices of oil — India’s top import — extended losses Tuesday after tumbling the most in four weeks after Donald Trump’s criticism that prices are too high.

The Sensex was down 0.4 per cent at 1:20pm in Mumbai, and the rupee traded 0.1 per cent lower at 71.0813 per dollar with suspected central bank intervention helping pare some losses, traders said.

Foreign Secretary Vijay Gokhale said in New Delhi today that India carried out strikes in Pakistan following an attack in Kashmir earlier this month in response to intelligence that indicated Jaish-e-Mohammad was planning more. The biggest Jaish-e-Mohammad training camp in Balakot was destroyed, Gokhale said. Over 300 terrorists were killed in the air strike, an unnamed Indian official said.

His statement has been “carefully worded to convey that the target was only the terror camps and there haven’t been any civilian casualty,” said A. K. Prabhakar, head of research at IDBI Capital Market Services Ltd. “Stocks may stay volatile for a couple of days as investors watch on how the other side responds to this action.”

The rupee is already Asia’s worst performing currency this year ahead of general elections due by May where Prime Minister Narendra Modi faces a tough fight from opposition parties. The yield on the most-traded 2028 bonds was up one basis point to 7.59 per cent, while spreads on State Bank of India’s 2024 dollar bonds widened eight basis points.

Some analysts said that strikes may boost equities as it will aid Prime Minister Narendra Modi’s electoral prospects.

“The positive perception to the Modi regime will aid valuations, even as they look expensive,” said Chokkalingam G, managing director at Mumbai-based Equinomics Research & Advisory Pvt.