Heightened Credit Risks Amidst Rising Tensions

S&P Global Ratings has issued a warning that the ongoing conflict between India and Pakistan could significantly increase credit risks for both nations. The agency highlighted the potential for sovereign credit support deterioration should tensions escalate further.

Current Ratings and Outlook: India maintains a 'BBB-' rating with a positive outlook, while Pakistan is rated 'CCC+' with a stable outlook. S&P anticipates elevated tensions could persist for the next two to three weeks, possibly involving significant military actions from both sides.

Economic Implications

S&P expressed confidence in India's robust economic growth, which is expected to facilitate gradual fiscal improvements. Conversely, Pakistan's focus is anticipated to be on economic recovery and fiscal stability. The report underscores that prolonged tensions would benefit neither nation.

Impact on Pakistan: An extended military engagement could hinder Pakistan's progress towards improving external and fiscal metrics essential for macroeconomic stability.

Impact on India: Sustained conflict may deter international investors looking to reorganize their global production operations amidst the current uncertain economic climate.

Recent Developments

Following the Pahalgam incident, India's military forces conducted operations targeting terrorist facilities in Pakistan and Pakistan-occupied Kashmir. Pakistan's leadership has expressed a willingness to de-escalate tensions if India takes corresponding steps.

S&P has revised India's FY26 growth projection downward to 6.3%, citing uncertainties surrounding US trade policies. The agency warned of the heightened risk of miscalculations that could exacerbate credit risks without material de-escalation in the coming weeks.