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Foreign funds unmoved by downgrade of Indian debt

Foreign fund managers said on Friday they expected the outlook for equity investment in India to be largely unaffected by a downgrade of the country's local debt to junk grade, saying the reasons for the cut were not new.

But they said they hoped the downgrade by Standard & Poor's would force the government to push ahead with privatisation, which was the biggest driver for stocks this year until the programme turned sour earlier this month.

S&P said after domestic markets had closed on Thursday that it had downgraded India's short- and long-term local currency sovereign ratings because of the country's swelling debt and vulnerable public finances.

"The downgrade will not have any bearing on our investment decisions," said Hong Kong-based Ashish Goyal, who helps manage $6 billion in Asia for Prudential Asset Management, adding that the country's macroeconomic fundamentals were known.

Foreign funds have pumped about $15 billion into Indian markets, but their holdings in bonds are just $200-$300 million.

"The concerns raised by S&P are valid, but they have to be looked at in the context of valuations and the earnings growth of corporates," said Bahrain-based Hemant Kulkarni, who manages about $80 million in Indian assets for Taib Bank.

The Bombay Stock Exchange's benchmark index is trading at a one-year earnings multiple of 10, the lowest in a decade. In early August, it had hit a 10-month low, with India's agriculture-dependent economy reeling from a severe drought.

The marker closed down 0.52 percent at 3,024.35 points on Friday.

"The Indian market is a stock pickers' paradise, and investors often choose to overlook the fiscal strains in the economy," said a Singapore-based fund manager, who declined to be identified.

He said companies that depended on domestic demand would benefit from a nascent economic recovery, while export-led software firms have grown despite a sluggish global economy.

Some fund managers said some good might emerge from the downgrade.

"I see this as positive because now the government has to do something on privatisation," said Singapore-based Samir Arora, the head of Asia Emerging Markets at Alliance Capital, referring to the downgrade.

Prudential's Goyal also said it was privatisation that would drive fund investments.

Growing opposition within and outside the government to the sale of two huge and profitable refiners threatens to derail privatisation, which was quick off the blocks this year and is viewed as one of the most successful threads of economic reform.

"If the government fails to sort out the issue in the next three months, the risk premiums will go up," Goyal said.

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