Indian and Pakistan shares fell on Wednesday as tensions between the two countries intensified with Islamabad saying it had shot down two Indian jets a day after Delhi said its warplanes had struck inside Pakistan.
Both countries have ordered air strikes over the last two days, the first time in history that two nuclear-armed powers have done so, while ground forces have exchanged fire in more than a dozen locations.
Tensions have been elevated since a suicide car bombing by Pakistan-based militants inIndia-controlled Kashmir killed at least 40 Indian paramilitary police on Feb. 14.
"Markets will remain volatile till these geopolitical tensions subside," said Neeraj Dewan, director at Quantum Securities.
The broader NSE Nifty fell 0.26 percent to 10,806.65, while the benchmark BSE Sensex closed 0.19 percent lower at 35,905.43.
"There is a concern that things should not escalate into a bigger problem," said Siddhartha Khemka, head of retail research at Motilal Oswal Securities.
"Now if something more has happened, it needs to be seen what kind of impact it will have in the geopolitical scenario. The market will take cognisance and remain cautious."
The NSE index rose as much as 0.96 percent earlier in the day and then fell as much as 0.78 percent, while the BSE index had gained up to 1.1 percent before declining as much as 0.7 percent.
In Pakistan, the benchmark KSE 100 Index fell 0.33 percent to 38,692.69 and the narrower KMI 30 index pulled back by 0.46 percent to 64,967.18.
"There are risks in the short term, till the entire cloud of uncertainty in the Indo-Pak tension passes... these tensions have been an incremental uncertainty for us," said Hitesh Agarwal, executive vice president and head – retail research, Religare Broking.
Foreign investors will be more concerned with the developments, market sources said, which could prompt some trimming of their bond and currency positions.
"There is clearly an escalation of tension between India and Pakistan. It is best to sell and be light as uncertainties are way too many," said a senior bond trader.
The Indian 10-year benchmark bond yield rose on the day to end the session at 7.6722 percent, while the partially convertible rupee closed at 71.24 per dollar compared with its previous close of 71.08, after dropping to a low of 71.49.