War threat hits Asian stock markets

Escalating tension: Pakistanis chant anti-India slogans

Escalating tension between India and Pakistan is sending jitters through the financial markets of both countries.

The Indian rupee has hit a new all-time closing low against the dollar.

The market is in the grip of uncertainty

Karachi share trader

And both the Indian and Pakistani stock markets are sharply down since the 13 December suicide bomb attack on the Indian parliament that killed 14 people.

In punitive measures following India's accusation that Pakistani intelligence services were to blame for the attacks, both countries have prevented the other's aircraft from flying in their airspace.

And on Friday, the Group of Eight leading industrial nations expressed serious concern about the threat of war, urging the two sides to resume dialogue.

Falling stocks

Financial markets usually react badly to uncertain times. With little indication of future market direction, many traders are reluctant to hold onto risky market positions, and sell heavily.

Pakistan International Airlines flies to India twelve times a week

Pakistani stocks dropped almost 3% on Friday's opening, due to the renewed fears of a war, before recovering somewhat by the close of business.

The leading index of shares on the Karachi Stock Exchange has lost more than 9% in the past three days, and 15.8% since the start of the year.

The leading Bombay stock index is fallen 6.7% since the 13 December attacks.

"The market is in the grip of uncertainty," said Shoaib Memon, a trader at Pakistan's Indosuez Carr Securities.

"People are worried because of the massive deployment of troops by the two sides. We don't know where all this tension will lead."

Currency woe

The Indian rupee hit a new closing low for the second day in a row on Friday.

The rupee ended at 48.27 to a dollar, below its previous closing low of 48.20 to a dollar.

The rupee has lost 1.12% of its value against the dollar since 13 December.

In contrast, it has only weakened by 2.4% during the whole year.

Despite the weakness, the central bank has not intervened to prop up the falling rupee.

Traders say this is because other regional currencies and the Japanese yen have also weakened against the dollar recently.

Airspace ban

The air sanctions are India's toughest economic offensive against Islamabad since the two countries went to war in 1971 over Bangladesh.

Pakistan International Airlines said it would have to cancel 12 flights a week to India and re-route 13 others to Asian destinations.

Flight times for Pakistani airliners heading to Manila, Tokyo, Bangkok, Singapore, Hong Kong and other destinations in the region are expected to increase by between 45 minutes and an hour.

No details of the economic cost of the diversions were released.

Frozen funds

The Group of Eight industrialised nations also put pressure on Pakistan to take further steps against terrorist groups acting from its territory.

Pakistan says it has already frozen the funds of the two militant groups which stand accused of the attacks.

But India's foreign minister said that the asset freeze was announced days in advance, allowing the terrorists plenty of time to withdraw their cash.