Mumbai attacks rattle already shaky investors

MUMBAI/HONG KONG (Reuters) - The attacks that left dozens dead in India's financial capital have dealt a fresh blow to the country as an investment destination, but India's size and growth will retain their allure over the long term.

India's shine had already been dulled as foreign portfolio investors fled from risk around the globe, helping send the country's once-soaring stock market down 55 percent this year. Tight liquidity, a battered currency and a slowing in its once-scorching economic growth add to the gloom.

The attacks on two luxury hotels and other targets were a reminder that risk in India extends beyond the red tape and crumbling infrastructure that investors accepted as a cost of doing business in the world's second-most-populous country.

"In the near term this highlights the risk of investing in markets which have instability of some form or the other," said Ashish Goyal, Chief Investment Officer at Prudential Asset Management in Singapore.

India, like other emerging and developed markets, has endured militant attacks before and managed to bounce back. Goyal said the long-term picture for India changes only if the latest attack hurts business, slows the economy and scares off foreign firms.

"It could raise the cost of security, it could raise the effectual cost of doing business, and at the margin that's not positive, but doesn't fundamentally alter the investment view or the perceived risk of investing in India," he said.

The timing of the attacks, which comes as the central bank struggles to defend a weakening rupee and stabilize credit markets, may hurt more than previous attacks, wrote Nikhilesh Bhattacharyya, an associate economist at Moody's Economy.com.

"This means that capital outflows will have a greater impact than they did in the past, though history suggests that any reaction to attacks in Mumbai will only be temporary," he said.

India's central bank expects the economy to expand by 7.5-8 percent in the 2008/09 fiscal year, but many private economists and some government officials see growth closer to 7 percent.

"We don't think there is any immediate impact on the Indian economy, although longer term, it will get that much harder to attract and retain foreign capital, at the margin," said Daniel Chui, Head of Investor Communications at JF Asset Management.

"Sentiment in India, particularly Mumbai, will be dented even more," he said from Hong Kong.

BRAVE FACE

Indian Trade Minister Kamal Nath on Thursday said he was confident the deadly attacks would not slow investment.

"This does not have an economic component," he told Reuters.

His confidence was echoed by Jan Masiel, a member of the European Parliament, who is visiting Mumbai with a trade delegation of eight.

"I don't think this affects India's image as a good place to do business in ... neither do we consider India to be an insecure or unsafe country to be in," said the Polish national, who was waiting to go back into the Taj Mahal Hotel, at the center of the hostage drama and where many died.

Some investors said that after the initial shock of the attacks wears off, attention will return to the fundamentals.

"India's fiscal position is not in particularly good shape, so this is my focus instead of the political," said Clement Ho, chief investment officer with Hang Seng Investment Management in Hong Kong, which invests a small portion of its $10 billion portfolio in India.

Markus Rosgen, head of Asia Pacific equity research at Citigroup, said that the political unrest in Thailand is proportionately more damaging to that country's markets. In the MSCI Asia index that excludes Japan and Australia, Thailand has a weighting of 2.2 percent, compared with 10.2 percent for India.

"As a global investor, as an Asia investor, I can ignore Thailand now. It's become very small in terms of market cap, relative to my index. But I can't do the same for India."

(Additional reporting by Narayanan Somasundaram in Mumbai and Jeffrey Hodgson in Hong Kong; Editing by Jean Yoon)