India conducted “surgical strikes” on suspected terrorist camps just across the border in Pakistan, marking its first direct military response to an attack on an army base it blames on Pakistan. The military offensive was the worst since 1999, when then-Prime Minister Atal Bihari Vajpayee – also a member of Modi’s nationalist Bharatiya Janata Party – responded to what he said was repeated cross-border infiltrations by militants in Kashmir.

At the same time, Pakistan said two of its soldiers had been killed in exchanges of fire and in repulsing an Indian “raid”, but denied that India had made any targeted strikes across the de facto frontier that runs through the disputed Himalayan territory of Kashmir.

The region is held equally by India and Pakistan but claimed in full by both. Terrorist violence killed 201 people in Kashmir in 2016, the deadliest year since 2010, according to the South Asia Terrorism Portal.

India’s announcement of the targeted strikes on terror camps in Pakistan is “very significant,” said Shashank Joshi, a fellow at the Royal United Services Institute in London. “India has conducted covert, retaliatory cross-border raids on many occasions in the 1990s and 2000s, but to prominently announce them is a provocative new approach,” he said in an e-mail. “Depending on how far the Indians penetrated and the nature of the targets, these might also represent much more ambitious operations.”

Domestic pressure had been building on Modi to take a tough stand over rising violence in the disputed region of Kashmir, Bloomberg reports, including through non-military measures such as reviewing a 1960 water-sharing treaty.

According to Reuters, the cross-border action inflicted significant casualties, the Indian army’s head of operations told reporters in New Delhi, while a senior government official said Indian soldiers had crossed the border to target militant camps. The Indian announcement followed through on Prime Minister Narendra Modi’s warning that those Delhi held responsible “would not go unpunished” for a Sept. 18 attack on an Indian army base at Uri, near the Line of Control, that killed 18 soldiers.

The strikes also raised the possibility of a military escalation between nuclear-armed India and Pakistan that would wreck a 2003 Kashmir ceasefire. Lt General Ranbir Singh, the Indian army’s director general of military operations (DGMO), said the strikes were launched on Wednesday based on “very specific and credible information that some terrorist units had positioned themselves … with an aim to carry out infiltration and terrorist strikes”. In other words, rather similar to what US-coalition forces do in Syria when they claim to attack ISIS when instead they kill members of the Syrian army.

Singh said he had called his Pakistani counterpart to inform him of the operation.

However, Pakistan’s military spokesman slammed the Indian account as “totally baseless and completely a lie”, calling the claim of surgical strikes an “illusion” and saying the contact between DGMOs only included communication regarding cross-border firing, which was within existing rules of engagement.

“We deny it. There is no such thing on the ground. There is just the incident of the firing last night, which we responded to,” Lt General Asim Bajwa told news channel Geo TV. “We have fired in accordance with the rules of engagement[…] We are acting in a responsible way.”  Pakistan said nine of its soldiers had also been wounded. Neither side’s account could be independently verified.

India’s disclosure of such strikes was unprecedented, said Ajai Sahni of the Institute for Conflict Management in New Delhi, and sent a message not only to his own people but to the international community. “India expects global support to launch more focused action against Pakistan,” Sahni told Reuters. “There was tremendous pressure on the Indian prime minister to prove that he is ready to take serious action.”

While both nations’ nuclear weapons deter all-out war, Modi was probably frustrated after Pakistani Prime Minister Nawaz Sharif rebuffed several diplomatic overtures, said C. Raja Mohan, director at the Carnegie India think-tank in New Delhi. Sharif in 2013 became Pakistan’s first leader to win power in a democratic transfer, but the nation has been ruled for almost half of its history by the military, which still wields great influence.

“There will be repercussions,” Mohan said. “And the management of the repercussions will be the next challenge. Now let’s see what they do. The ball is in Pakistan’s court.”

Quoted by Bloomberg after India’s announcement, Sharif said that Pakistan’s army is capable of defending its borders. He condemned firing across the de facto border that he said killed two Pakistani soldiers. Pakistan’s cabinet will meet Friday to discuss the “Indian aggression,” Radio Pakistan reported.

The millitary escalation between the two nations, who have fought three wars since 1947, have risen since a Sept. 18 assault on an Indian army camp in Kashmir that India blamed on Pakistan, though Pakistani leaders denied involvement. The attack left 18 Indian soldiers dead. China hopes issues between India and Pakistan are settled through dialogue, Foreign Ministry spokesman Geng Shuang said Thursday at a regular briefing. U.S. National Security Adviser Susan Rice called her Indian peer Ajit Doval on Wednesday, condemning the Sept. 18 “cross-border” attack and reiterating America’s expectation that Pakistan act against terrorists, the White House said in a statement on Wednesday.

“There is an escalation while global powers are asking both countries to sit and resolve the Kashmir issues,” said Rashid Ahmed Khan, professor of international relations at the University of Sargodha in Pakistan’s Punjab province, adding that both countries will probably calm down and move toward talks. “What India and Pakistan are doing to each other is to satisfy domestic constituencies and compulsions by taking hard positions.” Modi this week canceled a planned visit to Islamabad in November for a regional summit, and next week is due to review India’s ‘most favored nation’ trade status for Pakistan, although trade between the two nations is small.

While the “surgical strike” will likely not lead to significant escalation, India’s assets took the brunt of the attack: the rupee fell 0.6 percent to 66.8525 per dollar as of 2:14 p.m. in Mumbai, halting a five-day gain.

The benchmark S&P BSE Sensex dropped 1.5 percent. Pakistan’s benchmark equity gauge declined 0.4 percent. The yield on 7.83% govt note due April 2018 jumped 11 bps to 6.78% while the yield on 6.97% bond due Sept. 2026 rises 7 bps to 6.857%

Additionally, escalating tensions could sour sentiment for foreign investors who have pumped the most money into Indian stocks and bonds this quarter since March 2015.

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