BREAKINGVIEWS-Attacks cloud India's nascent safe haven status

By Una Galani and Shritama Bose

HONG KONG/MUMBAI, May 7 (Reuters Breakingviews) - Skirmishes between India and Pakistan are not new. But the rich world's stake in South Asia is rapidly increasing. That makes the risk of a conflict between the nuclear-armed neighbours harder to ignore for countries, executives and investors betting on the world's fifth-largest economy emerging from the global trade war as some kind of safe haven.

On Wednesday, hours after Prime Minister Narendra Modi unveiled a landmark trade deal with the UK and trumpeted his country's transformation into a vibrant hub of global commerce, India said it attacked nine "terrorist infrastructure" sites in Pakistan and Pakistani Kashmir. It's a jarring juxtaposition of economic and political events.

A muscular response from New Delhi was expected after an attack by Islamist militants on Hindu tourists killed 26 people in Indian Kashmir last month. That explains why Indian stock, bond and currency traders barely flinched on Wednesday morning local time: the Nifty 50 index .NSEI rebounded after starting in the red, 10-year government bond yields IN10YT=RR traded flat, and the rupee recovered some of its opening losses. The less developed markets in Karachi were more skittish.

India also has a high tolerance for geopolitical risk. One concern, however, is that New Delhi may not achieve its desired deterrence. Unsurprisingly, Pakistan's army warns it will respond. Over the longer term, India's suspension of a long-standing water-sharing treaty that ensured supply to 80% of Pakistani farms threatens to turbocharge poverty and fuel further violence.

Underscoring the lingering risks, several Indian states were due to conduct security drills on Wednesday to test civil preparedness, prompting multinational companies with global research and back office operations in the country to plan for the risk of power outages.

It's a sobering moment for those counting on India to capture a bigger share of American supply chains from China – Apple AAPL.O aims to make most of its U.S.-bound iPhones in India by the end of 2026. What's more, although the U.S. has not been a useful policeman of world order for some time, the danger of a conflict between India and Pakistan escalating may be higher under a chaotic administration in Washington.

New Delhi has the most to lose from a protracted standoff. Despite some progress in seizing its moment on the global stage, the country remains a highly regulated, inefficient and complex market where overall foreign direct investment is falling as a share of GDP. Among emerging markets, India has suffered some of the most selling by foreign institutional investors so far this year. Heightened tensions with Pakistan provide another reason for the undecided to look away.

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CONTEXT NEWS

India attacked Pakistan and Pakistani Kashmir on May 7, and Pakistan said it had shot down five Indian fighter jets in the worst fighting in more than two decades between the nuclear-armed enemies.

India said it struck nine Pakistani "terrorist infrastructure" sites, some of them linked to an attack by Islamist militants on Hindu tourists that killed 26 people in Indian Kashmir last month.

Islamabad said six Pakistani locations were targeted and that none of them were militant camps. At least 26 civilians were killed and 46 injured, a Pakistan military spokesperson said.

Indian forces attacked the headquarters of Islamist militant groups Jaish-e-Mohammed and Lashkar-e-Taiba, an Indian defence source told Reuters.

"India has demonstrated considerable restraint in selection of targets and method of execution," the country's defence ministry said in a statement.