By Nishant Kumar

MUMBAI (Reuters) - Investors in Indian shares should be overweight on financials at current prices as interest rates and inflation might moderate by the year-end, reviving interest in the sector, a fund executive said on Thursday.

Investors should also favour interest rate sensitive auto firms, but remain underweight on capital goods stocks as their valuations still look expensive, Kenneth Andrade, who manages 23 billion rupees at IDFC Asset Management Co, said.

"I have valuations in my favour in the former two, but not in the latter," Andrade told Reuters in an interview.

He held a fourth of his IDFC Imperial Equity Fund's assets in financials and auto stocks at July-end, data from fund tracker ICRA showed and added to his positions in nearly all the picks from the two sectors across four stock funds he manages.

The fund manager, who added HDFC Bank Ltd (HDBK.BO: Quote, Profile, Research) and more than doubled exposure to India's No. 1 lender State Bank of India (SBI.BO: Quote, Profile, Research) in one of his funds, said many banks were valued at their 2004 levels after a steep fall this year.

The BSE Bankex has plunged 42 percent in 2008, more than the near 31 percent drop in the benchmark index .BSESN, on inflation which has remained above the central bank's original target of 5.5 percent for the last 26 weeks.

The government expects inflation to hit 13 percent before it starts moderating.

"I might be a little early in the curve to actually play it," he said, adding, he was willing to take risk as he had valuation comfort.