ISLAMABAD: International rating agency Moody`s on Monday said sustained India-Pakistan tensions could negatively affect Pakistan`s growth and ongoing government efforts for fiscal consolidation and cause a setback to nascent macroeconomic stability.

In a special note, the New York-based rating agency also warned that the escalation in regionaltension could also disrupt Pakistan`s access to foreign funding flows. `A persistent increase in tensions could also impair Pakistan`s access to external financing and pressure its foreign-exchange reserves,` it noted.

The agency appreciated recent improvements in Pakistan`s economy as inflation dropped, growth slowly returned and foreign exchange reserves improved following IMF programme but noted that these gains were at risk due to heightened geopolitical instability following the April 22 Pahalgam incident, leaving 26 persons dead.

`Following the attack, India and Pakistan`s diplomatic relations have deteriorated,` Moody`s said, recalling Information Minister Attaullah Tarar`sstatement that Pakistan expected a military action by India.

On the other hand, the rating agency noted that macroeconomic conditions in India would be stable, bolstered by moderating but still high levels of growth amid strong public investment and healthy private consumption.

`In a scenario of sustained escalation in localised tensions, we do not expect major disruptions to India`s economic activity because it has minimal economic relations with Pakistan (less than 0.5pc of India`s total exports in 2024),` it said. `However, higher defence spending would potentially weigh on India`s fiscal strength and slow its fiscal consolidation,` it added.

Tensions have since spiked, with Pakistan reinforcing its forces as it expected an incursion and India`s premier granting `operational freedom` to his military. As temperatures remain high, with the military warning of a `swift` response to any misadventure by New Delhi, diplomatic channels have remained engaged to prevent conflict.

Notably, the agency warned that India`s suspension of the 1960 Indus Waters Treaty could `severely reduce Pakistan`s water supply`.