India-Pakistan tensions continue to escalate. Reports suggest that there were missile and air strikes across the border overnight, with claims from both sides on inflicting damage on the other side. The UN Secretary General has subsequently urged India and Pakistan to “avoid a military confrontation that could easily spin out of control.” Developments warrant attention, with further escalation a pertinent risk at this juncture. India’s domestic markets are likely to witness kneejerk profit-taking today, after remaining largely stable since tensions began simmering ten days ago. Meanwhile, onshore liquidity conditions are well-cushioned, with the durable surplus north of INR 2trn in the past few weeks. Upcoming RBI’s dividend transfer and support from unexpected open market operations this month (read here) are likely to increase this surplus further.
In a long-awaited move, India successfully concluded a free trade agreement with the UK on Tuesday, after three years of discussions. Negotiations revolved around three aspects – free trade deal, bilateral investment treaty and a social security part called Double Contribution Convention Agreement (this prevents double contribution to social security funds by Indian professionals working for limited periods in Britain) – of which two have been concluded. The deal might kick in after a year. Bilateral trade is expected to be nearly double in the coming few years, from the current scale of $21bn as of FY24. The size of total trade with the UK has increased by a third in the past decade, with India running a surplus in this period. To balance trade terms, India might lower tariffs on 90% of tariff lines, with 85% of these expected to be fully tariff-free within a decade (see press release), including in sectors like medical devices, food items, etc. Besides an exemption to the Indian workforce in Britain from insurance contributions, UK will get access to procurement projects in India. Concurrently, India is also expected to be amongst the first few in the region to reach a bilateral trade deal with the US before 3Q25, adding to expectations that the country may emerge as a beneficiary in the ongoing trade dispute.
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