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Mitul Kotecha, senior emerging markets strategist at TD Securities, points out that the tensions between India and Pakistan have ratcheted to their highest since the 1971 war.

Key Quotes

“PM Modi faces elections in May, and after state election losses last year, look tougher for his party. He could benefit if he is perceived to be taking a tough stance.”

“Ultimately international pressure could help to de-escalate tensions. The conflict comes at a bad time for Indian assets amid foreign portfolio outflows. Given the need to finance India’s current account deficit, this has pressured the INR.”

“During past friction between the two countries INR generally weakens while FX volatility rises. We think the RBI has plenty of ammunition to cap a rise in volatility.”

“We think the underperformance of Indian assets will not last, capital inflows will eventually resume and the INR will rally into Q2, reversing its underperformance.”