A bellicose history, religious rivalry and a general sense of antipathy towards each other have put India and Pakistan at loggerheads for the past half-century. After their nuclear showdown in May 1998, very limited opportunities for peace existed between the two. Nonetheless, in an astonishing policy reversal, the nationalist (BJP) government in India agrred to settle the dispute over Kashmir with Pakistan in a peaceful meanner. But, on the first anniversary of their nuclear tests, both India and Pakistan found themselves involved in an undeclared war in Kashmir. This article seeks to explore the internal dynamics of the conflict in Indian-held Kashmir, analyze the security ramifications, and highlight the scope for confidence building measures (CBMs) as a deterrent against any full-scale military confrontation between India and Pakistan. Finally, it throws light on the future of Kashmir following the Indo-Pakistani military encounter in Kargil in 1999.