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`India story' hits a bumpy patch

India's economy is growing by over 8 percent, IBM has just said it will triple its investment in the country and the number of mobile phone customers has hit the 100 million mark.

With these kind of market-friendly announcements, Indian shares should be soaring. Instead Mumbai's benchmark Sensex 30-share index has almost wiped out its year's gains of 34 percent, caught up in turmoil over fears rising interest rates and surging oil prices will slow global growth.

Now some investors are asking whether the "India story" -- the catchphrase analysts use to describe the country's vast potential market of 1.1 billion people and booming economy -- has suddenly gone cold.

RISK AVERSION

"The India story is not over -- it has just begun but it's going to be a story that unfolds over years and it's not always going to go smoothly," says JP Morgan analyst Rajeev Malik in Singapore.

"What you've seen is a reaction markets have to global risk aversion," he says. "Also some of the hype in asset prices has been corrected -- it's definitely healthy."

Instead of focusing on the roller-coaster share market, investors should keep their eye on the big picture in Asia's third-largest economy -- and be patient, analysts say.

"Economic fundamentals haven't changed. The India story on a one-to-two-year view is intact," says Deepak Lalwani, director of London-based stock brokerage Astaire and Partners.

In the fiscal year to March 31, India grew by 8.4 percent, beating the most optimistic forecasts. Growth raced ahead in the final quarter by 9.3 percent -- on par with China's blistering growth -- fuelled by unexpectedly strong farm output which has traditionally lagged other sectors.

Even with a quarter-point hike in India's trend-setting lending rate to 5.75 percent last week aimed at containing inflation, the government said on Friday it was "confident of more than 8 percent growth this fiscal year."

India's economy also remains a beacon for foreign investors, junior finance minister Pawan Kumar Bansal said.

Certainly IBM believes so, announcing last week it would invest US$6 billion over three years, underscoring India's importance as a world outsourcing hub.

RIGHT COMBINATION

"IBM is not going to miss this opportunity," IBM chairman Samuel Palmisano said. "If you're not in India making the right investments ... you won't be able to combine the skills and expertise here with the skills and expertise from around the world in ways that can help our clients be successful."

India has the largest pool of English-speaking graduates outside the US who are willing to work for salaries far below those paid in the West.

Hot on the heels of IBM's announcement, Motorola Inc said it would spend US$100 million in India to boost sales in one of the world's red-hot mobile markets which is adding around 4 to 5 million new customers every month.

Goldman Sachs, which forecasts India's GDP will outstrip Japan's by 2032, said last week the Indian market turmoil reflected global risk aversion rather than weakness in the economy.

BEARISH MARKET

Even if global growth decelerates due to a US slowdown, India will be less affected than other Asian markets because it has a bigger captive domestic market and it is not as export-oriented, economists add. But as far as the stock market, the pain may not be over yet, analysts say.

Snapping a prolonged losing streak, share prices jumped 5.5 percent on Friday to close at 9,810.46 but analysts say volumes were too thin to spell recovery.

"Market breadth is still not strong enough," says R. Balakrishnan, director of Mumbai's Parallex Consultancy Services, calling it a "relief rally rather than a distinct shift in the [bearish] trend."
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