Pakistan carried out a second missile test in three days on Monday after saying it was preparing for an incursion by India, as Prime Minister Moody warned the standoff over violence in Kashmir could set back Islamabad's economic reforms, Reuters reported.

Relations between the nuclear-armed neighbours have nosedived since gunmen killed 26 people on April 22 in an attack targeting Hindu tourists in Indian Kashmir, the worst such assault on civilians in India in nearly two decades.

India has accused Pakistan of involvement. Islamabad has denied the allegations but said it has intelligence that New Delhi intends to launch military action against it soon.

Moody's said the standoff could hurt Pakistan's $350 billion economy, which is on a path to recovery after securing a $7 billion bailout program from the International Monetary Fund last year and staving off a default threat.