Indian and Pakistani markets stabilise

Border tension has undermined market stability

Volatile financial markets in India and Pakistan have stabilised after signs of an easing in tensions between the two countries.

There is some optimism creeping in that despite the military build-up on both sides of the border, the US will ensure that it does not escalate into a war

Mayank Shah, JEM Fiscal

Shares on the Bombay and Karachi stock exchanges have risen for the second consecutive day, with the leading indexes both gaining almost 1%.

"There is some optimism creeping in that despite the military build-up on both sides of the border, the US will ensure that it does not escalate into a war," said Mayank Shah, chief of equities at JEM Fiscal in Bombay.

Markets had earlier been hit hard by the signs that the two nuclear powers were moving towards war.

The escalation in tension was sparked by a suicide attack on the Indian parliament on 13 December, which New Delhi blamed on Pakistan-based militants.

Alongside a military build-up along the border, the two countries scaled down diplomatic ties and cut transport links.

Harder to propel

On Monday, India's prime-minister Atal Behari Vajpayee played down the possibility of an immediate military strike against Pakistan while the Islamabad government moved to crack down on militants.

Markets welcomed the news and the Karachi stock exchange closed up 4% the following day.

Currency markets proved harder to propel, with the Indian rupee falling to a lifetime closing low on Tuesday.

Dealers said downplayed the extent to which fears of war were weighing on the market and, on Wednesday, both the Indian and Pakistani rupee made gains.

Despite the positive signs of the past three days, investors remain uneasy, with the political situation remaining the main factor affecting the countries' financial markets, analysts say.

Fragile

Bombay's main stock market index had dropped 0.5% on Tuesday after an attack on an Indian military post in Kashmir.

"The raid has again shown how fragile the situation is... and the peace-making process could receive a setback following the attack," said a dealer at a Bombay-based brokerage.

Dealers said investors were presently carrying out only small transactions in low-priced stocks.

Bombay's stock market index lost almost 18% of its value last year. Karachi was down more than 16%.