Pakistan tests missile, India orders drills amid Kashmir standoff

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 neighbours 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.

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.

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 programme 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 defence spending could weigh on New Delhi's fiscal strength and slow fiscal consolidation, Moody's added.