The near-term threat of severe escalation between India and Pakistan has waned, but ceasefire violations remain possible and, over the long term, disagreements on water-sharing and third-party mediation in Kashmir will sustain tensions and the risk of cross-border flare-ups. Late on May 12, India and Pakistan's directors general of military operations spoke by phone, days after India and Pakistan on May 10 agreed to a ceasefire after coming close to full-blown conflict. The ceasefire so far appears to be broadly holding (albeit tenuously), with clashes easing along the disputed India-Pakistan border in Kashmir, known as the Line of Control. Much remains unclear about the circumstances surrounding the truce, including the precise role international pressure played in bringing it about. However, the announcement came just hours after cross-border attacks had sharply escalated, with India reportedly striking several Pakistani airbases, including one near Islamabad, to which Pakistan responded by reportedly hitting two Indian airbases and a missile storage facility. The severity of the May 10 escalation threatened to plunge the two nuclear-armed rivals into an all-out war, which probably helped push both sides to quickly reach a ceasefire.

• India and Pakistan's clashes had intensified after India's military on May 7 struck alleged militant sites in Pakistan and Pakistan-administered Kashmir in retaliation for a deadly April 22 militant attack in India-administered Kashmir that New Delhi blamed on Islamabad. The May 7 strikes were the deepest India had carried out against Pakistan in years, helping fuel subsequent cross-border attacks from both sides. 
• Both countries have claimed victories in the wake of the recent clashes. India says it killed over 100 militants in recent operations, while Pakistan says it struck 26 Indian military sites and launched dozens of unmanned aerial vehicles toward major Indian cities, including New Delhi. 

In the near term, the ceasefire will likely ease the threat of further kinetic strikes beyond Kashmir or other severe clashes, though violations along the border and more business disruptions remain possible, likely with more severe implications for cash-strapped Pakistan. Both countries' ability to claim victories in the wake of recent clashes and the mutually recognized costs of further escalation will likely dissuade India and Pakistan from carrying out additional large-scale strikes against each other over the coming days, particularly those targeting military bases and other assets beyond the disputed Kashmir region. That said, severe tensions and mistrust between the two countries remain, and reports suggest some officials, particularly in India, remain dissatisfied with the current outcome. Indeed, in his first major speech since the ceasefire was announced, Indian Prime Minister Narendra Modi said on May 12 that India had "only paused" its kinetic action against Pakistan, and would "retaliate on its own terms" in the event of any future militant attacks on India. Further clashes along the Line of Control thus remain possible, at least until the two sides agree on more concrete measures to de-escalate or better uphold a longer-term cessation of hostilities. Heightened uncertainty regarding the potential for renewed violence will also sustain an elevated potential for disruptions to travel and business operations in the Kashmir region and beyond, particularly along the two countries' border. Should the ceasefire generally hold in the near term, it would likely imbue cautious optimism among investors and bolster confidence for markets, potentially unlocking delayed capital flows and improving regional economic outlooks. For Pakistan, the ceasefire announcement came a day after the International Monetary Fund, or IMF, approved a $1.4 billion tranche of funding for Islamabad, offering a critical boost as the country tries to stabilize a severe macroeconomic crisis. However, any perceived escalation in tensions and imminent threat of major renewed skirmishes with India would likely quickly erode any brief improvement in investor confidence. Additionally, should the threat of renewed conflict persist for months, prolonged unease among investors may increasingly undermine Pakistan's ability to meet upcoming IMF conditions, such as fiscal consolidation and stronger revenue collection. This could prompt the Fund to delay disbursing the next tranche of Pakistan's loan, which would further deplete the country's already-low reserves, while stalling fresh loans and debt rollovers from creditors. 

• Following the announcement and tentative maintenance of the ceasefire with Pakistan, Indian shares posted their strongest gains in over four years on May 12, with the benchmark index surging nearly 4%. In a parallel response, Pakistan's KSE-100 index soared by 9.4% after a trading halt, reflecting heightened investor optimism.
• Beyond market gains, early signs of cautious optimism due to the May 10 ceasefire are evident in resumed commercial activity, with both India and Pakistan lifting airspace restrictions, reopening major airports and restoring some flight operations. This will likely also help boost trade, tourism and investor movement.
• India's strong economy better positions it to withstand the financial fallout from and the costs of a prolonged conflict. This, combined with reports that some Indian officials are particularly aggrieved with how the latest flare-up with Pakistan ended, suggests New Delhi would be more likely than Islamabad to carry out further escalatory strikes and resume major fighting. Among other things, certain Indian officials have allegedly taken issue with the United States' independent announcement of the ceasefire, which, alongside statements by U.S. officials suggesting India and Pakistan will discuss broader bilateral issues and the long-standing dispute over Kashmir, caught them by surprise. 

India and Pakistan are unlikely to compromise on long-standing bilateral issues in the coming months, particularly related to Kashmir and water-sharing, which in the longer term will keep the door open to further cross-border violence, as well as worsening water shortages in Pakistan. Regardless of any potential agreements that improve both sides' commitment to a ceasefire in the near term and the potential for some discussions about broader disputes, relations between India and Pakistan will likely remain severely strained over the coming months, given that the two sides will have little desire to compromise in any discussions on the broader, thorny issues that have long fueled bilateral mistrust, such as water security and allegations of support for cross-border terrorism. Further major cross-border kinetic exchanges will thus remain possible in the coming months. Beyond intense clashes along the Line of Control in Kashmir, this may even include strikes on military targets beyond the disputed region, and given the severity of the two sides' recent flare-up, would likely have a greater risk of more quickly escalating. More broadly, U.S. President Donald Trump's equal treatment of India and Pakistan (in contrast to his recent predecessors, who generally leaned more toward New Delhi), along with Trump's repeated references to resolving the Kashmir dispute, will likely be interpreted in India as a diplomatic setback, especially given longstanding U.S.-India alignment on strategic and economic issues. In contrast, Pakistan sees the ceasefire and Trump's overtures as a diplomatic win, given Islamabad has long sought international involvement in the Kashmir dispute and will likely continue to leverage external mediation in future negotiations. Against this backdrop, India will likely remain reluctant to participate in broader talks with Pakistan, particularly those implying any change in Kashmir's status or international oversight. This means that substantive negotiations to improve relations between the South Asian rivals are unlikely to materialize. India has also not signaled any intent to reinstate the Indus Waters Treaty, which it suspended in the wake of the April 22 Kashmir attack, rupturing one of the few long-standing areas of cooperation between India and Pakistan. The continued suspension of the treaty, which was signed in 1960 to govern the sharing of the Indus River system, will likely further challenge diplomatic progress and heighten the risk of flashpoints between the two countries. Most immediately, the suspension of flood warnings and the sharing of critical hydrological data will leave Pakistan vulnerable to sudden flooding. But in the medium to long term, if India builds infrastructure that draws more water from the river and reduces downstream flows, it would disrupt Pakistan's vital water supply, harming agriculture and food security, while worsening economic strain, particularly in Punjab and Sindh.

• The perception that the White House is placing both India and Pakistan on the same diplomatic plane undermines India's effort to frame its relationship with the United States as a comprehensive partnership distinct from its Pakistan strategy. However, this is unlikely to derail New Delhi's ongoing trade talks with Washington, which are aimed at finalizing a deal to offset Trump's "reciprocal" tariffs.
• In a speech on May 10, Pakistani Prime Minister Shehbaz Sharif expressed appreciation for the United States, China and Saudi Arabia for their reported help in bringing about the ceasefire, signaling Pakistan's intent to involve external players in future mediation. However, in a May 12 speech, India's Modi indicated that broader talks with Pakistan, as envisioned by the United States following the ceasefire, were unlikely to take place.
• Reinstating the Indus Waters Treaty will likely be a key focus in Pakistan's discussions with India, though it remains uncertain whether India will make any concessions, especially given its prior interest in modifying the treaty. On April 26, Pakistani authorities reported that India released water from the Uri Dam in India-administered Kashmir without prior notice, causing a 22,000-cusec rise in the Jhelum River and prompting a warning of potential partial flooding in Pakistan-administered Kashmir. Additionally, reports on May 5 suggested that India had begun a "reservoir flushing" process to clear sediment, which can release sediment-laden water downstream and trigger flash floods.