Pakistan carried out a second missile test in three days on Monday and India said it ordered several states to conduct security drills, as fears mounted the neighbors could be heading to a confrontation over a deadly attack in Kashmir.
Moody's warned that the standoff could set back Islamabad's economic reforms as world powers called for calm.
Relations between the nuclear-armed states have nosedived since gunmen killed 26 people on April 22 in an attack targeting Hindu tourists in Indian Kashmir, the worst such assault on civilians in India in nearly two decades.
India has accused Pakistan of involvement. Islamabad has denied the allegations but said it has intelligence that New Delhi intends to launch military action against it soon.
The countries have shut their land borders, suspended trade, and closed their airspace to each other's airlines, and there have been exchanges of small arms fire across the frontier in Kashmir.
India's interior ministry has asked several states to conduct mock security drills on May 7 to ensure civil preparedness, a government source told Reuters on Monday. They did not say which states or mention Pakistan or Kashmir.
The drills will include air raid warning sirens, evacuation plans and training people to respond in case of any attacks, added the source, who asked not to be named.
Earlier, the Pakistani army said it had tested a Fatah series surface-to-surface missile with a range of 120 km (75 miles), two days after a successful launch of the Abdali surface-to-surface ballistic missile with a range of 450 km.
Prime Minister Shehbaz Sharif said the successful test launch "made it clear that Pakistan's defense is in strong hands".
Information Minister Attaullah Tarar told journalists there was no communication channel open with India at the moment.
The Himalayan region of Kashmir lies at the heart of decades of hostility between Hindu-majority India and Islamist Pakistan, both of which claim it in full but rule it in part.
India has accused its neighbor of supporting Islamist separatists battling security forces in its part of the region. Pakistan says it only provides diplomatic and moral support for Kashmiris seeking self-determination.
ECONOMIC COST
Moody's said the standoff could hurt Pakistan's $350 billion economy, which is on a path to recovery after securing a $7 billion bailout program from the International Monetary Fund last year and staving off a default threat.
"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.
"A persistent increase in tensions could also impair Pakistan's access to external financing and pressure its foreign-exchange reserves," it added.
The report comes two days after Reuters reported that India has asked the IMF to review its loans to Pakistan.
India's economy is not expected to see major disruptions since it has "minimal economic relations" with Pakistan - although higher defense spending could weigh on New Delhi's fiscal strength and slow fiscal consolidation, Moody's added.
Iran's foreign minister, who earlier said his country was ready to help India and Pakistan "forge greater understanding" after the attack, was in Pakistan on Monday to meet leaders. He will visit India on Thursday.
Russia said on Monday it was following the situation with great concern and that it valued its ties with both countries.
President Vladimir Putin "strongly condemned" the Kashmir attack in a call with Indian Prime Minister Narendra Modi and expressed full support to India in its "fight against terrorism", India's Foreign Ministry spokesperson Randhir Jaiswal said on X.
Pakistan said on Monday it will "formally apprise" the United Nations Security Council of the situation and call upon it "to exercise its primary responsibility for the maintenance of international peace and security by taking appropriate measures".
