IND vs PAK tensions likely to pressure Pakistan's forex reserves, India to have no major disruptions: Moody's

Pakistan's foreign exchange (forex) reserves are likely to come under pressure and weigh on the nation's growth rate, reported the news agency PTI on Monday, May 5, 2025, citing a Moody's report.

“Sustained escalation in tensions with India would likely weigh on Pakistan's growth and hamper the government's ongoing fiscal consolidation, setting back Pakistan's progress in achieving macroeconomic stability,” Moody's said in their report.

The ratings and research agency also reportedly highlighted that they do not expect any major economic disruptions in India's economic activity due to the rising tensions between Pakistan and India after the Pahalgam terrorist attack.

India and Pakistan have minimal economic relations, with less than 0.5 per cent of India's total exports in 2024. Hence, the rising tensions are expected to have no major effect.

As per the report, India's exports to Pakistan from April to January of the 2024-25 fiscal year stood at $447.65 million, while imports were at $0.42 million.

According to the report, Pakistan's macroeconomic conditions have been improving, fueled by growth, declining inflation and rising forex reserves. However, the ratings agency expects the India-Pakistan tensions to weigh in on Pakistan's reserves.

“A persistent increase in tensions could also impair Pakistan's access to external financing and pressure its foreign-exchange reserves, which remain well below what is required to meet its external debt payment needs for the next few years,” according to the Moody's report, cited by the news agency.

Pahalgam Terrorist Attack

The tensions between India and Pakistan have increased since a Lashkar-e-Taiba offshoot, The Resistance Front (TRF), killed 26 tourists on Tuesday, April 22, in Jammu and Kashmir's Pahalgam tourist resort.

India has reportedly identified five terrorists, including three Pakistani nationals, behind the Pahalgam terrorist attack. 

Pakistan's funding

The International Monetary Fund (IMF) is set to meet with the Pakistani officials on May 9, 2025, to discuss a fresh funding of $1.3 billion under its climate resilience loan programme. The officials will also assess an ongoing $7 billion bailout package for the nation.

The agency report also cited people aware of the development and said that India will also ask the global multilateral agencies, including the IMF, to re-examine funds and loans provided to Pakistan.

“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. However, higher defence spending would potentially weigh on India's fiscal strength and slow its fiscal consolidation,” they said, according to the agency report.

As per the report, Moody's has a ‘Caa2’ rating on Pakistan. This means that the debt owed to Pakistan is of poor quality with a high chance of default risk. Moody's rating on India is ‘Baa3’, which is the lowest investment grade rating.