India faces investment fallout from nuclear tests

FOREIGN investors yanked a record amount of money out of India last month as the country's nuclear tests triggered economic sanctions and shook confidence. Foreign investors sold a net $215.7m (pounds 131.5m) worth of stocks and bonds, the biggest one-month withdrawal since India opened its markets in 1992.

"India was seen as a safe haven but this has taken that label away," said Andrew Holland, head of research at DSP Merrill Lynch in Bombay. Indian stocks have fallen 12 per cent, and the rupee has weakened 5 per cent to new lows against the dollar since India first tested nuclear devices on 11 May.

Now sanctions and investor concerns are threatening to hobble economic growth. Reaction to the nuclear tests has made it more expensive for the government and companies in India to borrow money, and the weakened rupee is convincing investors to postpone their purchases. "Now nobody wants to have exposure to this part of the world," said Hina Shah, manager for JM Capital Management in Bombay.

Analysts are also concerned that the nuclear tests will scare away some of the foreign investment in the ports, roads and power plants the country needs to keep growing. India's GDP growth slowed to around 5 per cent last year from more than 7 per cent a year in the three previous years.

The shares of India's largest companies were among the stocks worst hit. Reliance Industries, India's largest petrochemical company, has fallen 13 per cent since the tests. State Bank of India, the largest commercial bank, plunged 22 per cent.

While the pace of selling is expected to slow now that the initial shock is over, analysts don't anticipate much foreign buying either. Foreign investors aren't expected to return to the market until they are sure there won't be any more sanctions.

"The market isn't going to recover in a hurry,'' said Manisha Dutt, at Credit Capital Asset Management in Bombay. "The bulk of the buying will be postponed until stocks and the rupee fall further."

Copyright IOS & Bloomberg.