Indian shares retreated in midday trade after Pakistan said it shot down two Indian jets on Wednesday, escalating conflict between the two nuclear-armed neighbours, a day after Indian warplanes struck inside Pakistan.
The broader NSE Nifty fell by 0.8 percent to 10,751.20 after rising as much as 0.96 percent earlier in the day, while the benchmark BSE Sensex declined by 0.7 percent to 35,735.330, after gaining up to 1.1 percent.
"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. Market will take cognisance and remain cautious."
Tensions have been elevated since a suicide car bombing by Pakistan-based militants in India-controlled Kashmir killed at least 40 Indian paramilitary police on February 14, but the risk of conflict rose dramatically on Tuesday when India launched an air strike on what it said was a militant training base.
Police officials in Kashmir said that two Indian pilots and a civilian had died after an Indian air force plane crashed in Kashmir, but did not confirm if the plane had been shot down by Pakistani forces.
Indian officials said three Pakistani jets had also entered Indian airspace, before being intercepted and forced turned back.
In the light of intensifying tension, the Indian Air Force ordered Kashmir's main airport in Srinagar along with at least three others in neighbouring states to be closed.
Foreign investors are likely trimming their bonds and foreign exchange positions due to rising tensions between India and Pakistan. "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 10-year benchmark bond yield rose to 7.68 percent, the highest since Jan. 2, while the rupee weakened to 71.47 to the dollar from Tuesday's close of 71.08.