(Reuters) – Indian shares slipped into the red and the rupee weakened after Pakistan said it shot down two Indian jets on Wednesday, a day after Indian warplanes struck inside Pakistan.

Islamabad said it had carried out air strikes in Indian-controlled Kashmir and shot down two Indian jets in its own airspace, capturing one of the pilots as the conflict with its nuclear-armed neighbour continued to escalate.

Tensions have been elevated since a suicide car bombing by Pakistan-based militants in Kashmir killed at least 40 Indian paramilitary police on February 14, but tensions mounted on Tuesday when India launched an air strike on what it said was a militant training base.

Police officials in Indian-occupied 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 to turn back.

“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. The market will take cognisance and remain cautious.”

The broader NSE Nifty was down 0.18 percent at 10,815.60 as of 0816 GMT, while the benchmark BSE Sensex was 0.08 percent lower at 35,943.21.

The NSE index had risen as much as 0.96 percent earlier in the day and then fallen as much as 0.78 percent, while the BSE index had gained up to 1.1 percent.

Pakistani stocks fell sharply during morning trade with the benchmark KSE 100 Index index down 3.34 percent and the narrower KMI 30 index down 3.6 percent in Karachi.

“There are risks in the short term, till the entire cloud of uncertainty in the Indo-Pak tension passes…these tensions have been an incremental uncertainty for us,” said Hitesh Agarwal, EVP and head – retail research, Religare Broking.

Foreign investors will be more concerned with this, he added.

Foreign investors are likely trimming their bonds and foreign exchange positions due to the 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 71.49 to the dollar from Tuesday’s close of 71.08.