India stable but post-Pahalgam tension could ‘impair’ Pakistan’s access for foreign funds: Moody’s

Credit ratings agency Moody’s has warned that sustained tensions between India and Pakistan following the April 22 terror attack in Pahalgam could significantly undermine Pakistan’s economic recovery, impair its access to foreign financing, and delay progress under its ongoing IMF programme.

The agency’s May 5 sector comment comes amid rising speculation that India may carry out a retaliatory strike after suspected Pakistan-based militants killed Indian tourists in Jammu and Kashmir. While India (Baa3 stable) remains macroeconomically stable, Moody’s said Pakistan (Caa2 positive) could see heightened vulnerability, particularly in case of military escalation .

India’s leadership has held a string of security consultations in recent days, including meetings between Prime Minister Narendra Modi and top defence officials, fueling speculation of an imminent response. The April 30 statement by Pakistan’s information minister, warning of a potential Indian strike, has only heightened regional anxiety.

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Pakistan’s macroeconomic outlook had shown signs of gradual improvement with rising growth, falling inflation, and continued IMF support . However, Moody’s cautioned that any prolonged military standoff with India could derail this fragile momentum.

“A persistent increase in tensions could also impair Pakistan’s access to external financing and pressure its foreign-exchange reserves,” the note warned, pointing to Pakistan’s already low reserves that fall far short of what is needed to meet upcoming external debt obligations.

In contrast, India’s economy remains relatively insulated from the fallout, given its minimal trade exposure to Pakistan- less than 0.5 per cent of total exports in 2024. Moody’s said India’s fiscal strength may still be tested if government spending surges due to sustained tensions, but broadly expects stability to hold.

The agency noted that military flare-ups between the nuclear-armed rivals have recurred throughout their post-independence history but rarely escalated into full-scale conflict. Nevertheless, its geopolitical risk assessment now factors in an elevated threat of localised military actions.

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The post-Pahalgam deterioration in diplomatic relations has already triggered punitive steps. India has held the Indus Waters Treaty of 1960 in abeyance, a move that could severely reduce Pakistan’s water supply. In response, Pakistan halted the 1972 Simla Agreement, closed its airspace to Indian carriers, and downgraded bilateral engagement.