Surgical strikes likely to have economic implications on India: Care Ratings

The Indian Army's surgical strikes against suspected Pakistan-based militants along the Line of Control (LoC) on late Wednesday night is likely to have economic implications on India, said Care Ratings in a latest research report.

The ongoing attack is likely to have immediate and medium to long term economic impact on the country depending upon the duration of the ongoing border tensions between the two nations,  it said.  

As far as immediate implications of attacks are concerned, it affected the Indian stock markets, government securities and exchange rate, cited Care Ratings in a report on Thursday.

 A day after the attack the key benchmark market indices BSE Sensex and NSE Nifty went down by 465 points and 154 points, respectively on Thursday whereby recording 1.64% and 1.76% fall, respectively on the day.

The 10-year yield in government securities (Gsecs) witnessed a rise on the day. The Gsecs yield on the day rose up from 6.78% to 6.86% as the markets remains uncertain and cautious about the strikes and the future course of the ongoing tensions on the border.

The Indian Rupee has fallen to its lowest in a week against the US dollar from 66.47 to 66.85 level on Thursday. 

"The uncertainties in the country coupled with the weak performance of the equity market weighed on the Indian Rupee as well, causing it to weaken," said Care Ratings economists Madan Sabnavis and Anushka Sawarkar in a recent report.  

The ratings agency has projected the medium to long term economic implications of the attack on India as speculative depending on the duration of the military activity.  

It expects the issue to settle down in the next couple of days and if this happens it has projected the Indian stock markets to be volatile and the Reserve Bank of India (RBI) to cut interest rates in the upcoming monetary policy. 

"The markets will remain turbulent with the investors remaining wary about the future course of actions and the probable consequences of the same. Higher interest rates, weaker currency and nervous stock markets would be the likely situation. However, with fundamentals being strong, it may be expected that the volatility will be with shorter amplitudes," said the two economists from Care Ratings in a report. 

The RBI will hold its monetary policy meet on October 4 and it will be viewed as the significant event by the markets as it will be the first policy meet under the new Governor Urjit Patel. 

"While under normal circumstances, we would expect an unchanged stance, depending on the seriousness of the battle and the reaction of the market, the RBI could consider more seriously a rate cut. The chances of such action would increase until Tuesday depending on the course of the tension at the LoC," the two economists further added. 

The report has also projected a possibility that a prolonged tenure of such tension between the two countries will lead to increase in the government's expenditure on the country's defence.

"The decision will be whether to increase allocations for defence expenditure and cut down on other capex or do so with a higher deficit," the two economist said. 

The agency has further said that the industries related to defence sector will get a boost due to prolonged attack, which will help India's economic growth. 

The country's gross domestic product (GDP) and inflation are less likely to be impacted by the attacks. 

As per Care Ratings, the prolonged attacks will have no significant impact on the country's trade and investment as Pakistan is not a significant partner of India. 

Moreover, the exchange rate would remain stable with close monitoring by the RBI, it further added.