Kashmir, a Himalayan region between India and Pakistan that is claimed by both and divided between the two nuclear-armed powers, is facing heightened tensions after recent actions by India.

On August 6, the government of India Prime Minister Narendra Modi dissolved a 70-year-old constitutional provision that provided autonomy to the India-administered region of Jammu and Kashmir. The area consequently became two federal territories — Jammu and Kashmir along with neighboring Ladakh — allowing Delhi to exert greater control.

Tensions immediately rose with Pakistan, and some investors noted the developments.

“India is making moves in Kashmir, which some fear could flare into conflict with Pakistan,” Art Cashin, a managing director of UBS Financial Services, wrote in a note on August 8th. “Two nuclear powers nose to nose. That can't be good for the markets, or the world.”

Article 370

The history of the region is a complicated one.

After 1947, during the partition of British India and what followed, there were disagreements about what would happen to the former princely state of Jammu and Kashmir.

Article 370 was born as a temporary fix, an addition to the Indian constitution shortly after the partition to give the region autonomy until a decision was made about whether India or Pakistan would rule.

And so Jammu and Kashmir — which shared borders with Pakistan and China — were allowed to operate autonomously since the 1947 partition of British India.

Under Article 370, India administers the Hindu-majority region of Jammu and part of Muslim-majority Kashmir.

Pakistan administers two areas — the rest of Kashmir and Gilgit-Baltistan — while China administers a northeastern part of Kashmir called Aksai Chin, which India claims as its own.

Last year, India’s Supreme Court ruled that Article 370 would become a permanent part of the constitution.

Modi and his Bharatiya Janata Party amended the law through a bill in early August.

“After five years, seeing development in J&K (Jammu and Kashmir) under the leadership of PM Modi,” Indian Home Minister Amit Shah said before the country’s parliament passed the bill, “people of the valley will understand drawbacks of Article 370.”

Telephone lines, internet, and TV networks were then blocked while restrictions were placed on residents’ movement and assembly. (Both of those measures were eased on August 16.)

An increased number of Indian troops now parole the region.

‘It’s not just Kashmir that has investors spooked’

Experts are divided over how to read the situation.

“Over time, this change may support the state’s economy as it will allow more investment from the rest of India to flow in given the removal of previous local regulations and other impediments,” Barclays analysts wrote note on August 9th. “But in the near term, the state’s economy, which is already weak, may struggle amid more uncertainty.”

Akhil Bery, an analyst with Eurasia Group, told Yahoo Finance that this situation — at least for now — doesn’t warrant alarm.

“This is just another stress point for investors with India,” said Bery. “Investors aren’t only worried about this, it’s also about the budget. Investors were significantly disappointed by the budget … [so] it’s not just Kashmir that has investors spooked.”

Modi’s government has not met investors’ and businesses’ expectations and has failed to make India a global power.

“For right now, it’s something to monitor and not act on,” added Bery. “If there is an increase in violence, that could spook investors.”

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Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami.

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