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UPDATE 1-Shun Malaysia, India's palm oil buyers told amid Kashmir standoff

(Adds details, quotes)

By Rajendra Jadhav and Aftab Ahmed

NEW DELHI, Oct 21 (Reuters) - India's top vegetable oil trade body on Monday asked its members to stop buying palm oil from Malaysia, an unprecedented call that could help New Delhi punish the Southeast Asian country for criticising India over its policy towards Kashmir.

The directive by the Solvent Extractors’ Association of India (SEAI) shows how nationalist sentiments can impact international business, and is a big blow to Malaysia, the world's second largest producer and exporter of palm oil after Indonesia.

India was Malaysia's third-largest export destination in 2018 for palm oil and palm-based products worth 6.84 billion ringgit ($1.63 billion). Vegetable oil contributed 2.8% of Malaysia's gross domestic product last year and 4.5% to total exports.

"Our government has not taken kindly to the unprovoked pronouncements by the Malaysian prime minister and is contemplating some retaliatory action," SEAI President Atul Chaturvedi said in a statement carrying a note to its members.

"It would be in fitness of things, as responsible Indian vegetable oil industry, we avoid purchasing of palm oil from Malaysia till such time clarity on the way forward emerges from Indian government."

He said the guidance was issued in its own interest as well as a mark of solidarity with the country.

Reuters reported that India was considering curbing imports of some products from Malaysia, including palm oil, after Prime Minister Mahathir Mohamad said last month that India had "invaded and occupied" Kashmir, a disputed Muslim-majority region also claimed by Pakistan.

India stripped its portion of the Kashmir valley of statehood and autonomy on Aug. 5.

Some Indian traders said refiners had already stopped buying Malaysian palm oil for shipment in November and December, fearing higher import taxes or other measures. In any case, household palm oil consumption falls in India during winter as the tropical oil solidifies at lower temperature.

"After the Reuters story, many importers stopped buying Malaysian palm oil," said a Mumbai-based dealer with a global trading firm, requesting anonymity as he was not authorised to talk to media.

"Now since the trade body has issued an advisory, almost all refiners will stop buying. In the last one week alone, I saw two buyers switching to Indonesia from Malaysia."

India's government has rebuked Malaysia for its stance on Kashmir but has not commented on any trade measures. India's trade ministry declined to comment.

Malaysia said last week it was considering raising imports of raw sugar and buffalo meat from India, in a bid to ease the trade tensions. (Reporting by Rajendra Jadhav and Aftab Ahmed; Writing by Krishna N. Das, Editing by Alison Williams and Ed Osmond)

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