Foreign investors see limited Mumbai attack fallout

By Peter Apps - Analysis

LONDON (Reuters) - Foreign investors may further dump Indian assets after the Mumbai attacks and worry over tension with Pakistan, but the impact will be limited and Western firms facing recession at home remain keen to tap the subcontinent's growth.

Two hotels heavily used by foreign businessmen were at the centre of last week's attack in which 10 Islamist gunmen killed more than 180 people.

Indian stockmarkets had already been down more than 60 percent so far this year, part of a global sell-off that has seen emerging markets suffer even worse than their developed counterparts as investors dumped perceived risk and lenders called in debts.

Foreigners have sold $13.7 billion (9.2 billion pounds) of Indian shares this year, and were said to be amongst the biggest sellers on Monday when Bombay's main share index fell 2.78 percent on Monday.

The rupee fell towards an all-time low both on the attacks and worsening global and local economic statistics including falling Indian vehicle sales and exports.

"It seems unlikely that the terrorist attacks will have much of an impact on the Indian economy" said senior currency strategist Win Thin at Brown Brothers Harriman in New York in a research note. "However, it will certainly sour investor sentiment at a time when it was already poor. And the attacks come at a time when the economy is slowing and is the most vulnerable it has been in years."

India's lending market seized up in October as global credit market turmoil hit bank lending, and a 150 basis point rate cut and the release of billions of dollars into the financial system by the central bank has not been enough to stem the slowdown.

Data on Friday showed the economy expanded 7.6 percent in the September quarter, well below the 9 percent seen in all of 2007/8 but well above developed economies most of which are seen already in recession.