The exchange of fire took place after Army's 32 Rashtriya Rifles (RR) patrol party was passing through the Watergam area.
A senior police officer said the terrorist, who was hiding, fired upon the patrol party when they were passing through the area and the exchange of fire started. He also added that in the firing a terrorist was killed.
As per the sources, a pistol and three grenades were recovered from the terrorist. However, the identity of the terrorist is yet to be ascertained.
A search was conducted in the area throughout the night.