MUMBAI, Dec 19: Foreign funds are expected to hold back on fresh investments in India while they see how a tense standoff with Pakistan over last week’s deadly attack on the Indian parliament develops.

But analysts do not see a pullout by the funds, which have pumped in a record $2.82 billion into shares and bonds so far this year, against $1.56 billion in the whole of 2000, unless the situation escalates towards a war.

“I see relatively little impact and whatever effect these attacks have will be in the short term,” said Hong Kong-based Ashish Goyal, who helps manage $6 billion at Prudential Asset Management Asia.

Financial markets have been shaky since last Thursday’s suicide attack, which New Delhi blames on Pakistan-based Kashmiri separatist groups.

Islamabad has condemned the attack which killed 14 people, including the five assailants.

India’s key share index tumbled more than three percent after the attack and has since been adrift. Bonds are flat but the tightly-controlled rupee has risen. On Wednesday, in his first statement to parliament since the assault, Prime Minister Atal Behari Vajpayee said India was using diplomacy as its first weapon to put pressure on Pakistan but added other options were still open.

The stand-off has hit market sentiment, but analysts hope foreign investors will remain attracted by the potential of an economy which has been one of the world’s fastest growing over the past decade.

The central bank expects the Indian economy to grow around five per cent in the current fiscal year ending March 2002.

While that would be the third straight year of slower growth, it is still a healthy clip at a time when the global economy looks headed towards recession.

Analysts point to the relative resilience of the economy to external developments and natural disasters as a key factor behind their confidence foreign investors would stay in India.

The economy grew by an annual average of six per cent in the three financial years of 1998/99 to 2000/01, despite a series of difficulties — killer cyclones in eastern and southern India, economic sanctions after nuclear tests in 1998, and a prolonged clash with armed intruders in Kashmir’s strategic Kargil heights.

“Certainly there is some nervousness and markets are going to remain dormant in the short-term but eventually economics will guide the destiny of the markets,” said U.R. Bhat, chief investment officer at J.F. Asset Management India Pvt Ltd.

Bhat, who manages $500 million in Indian assets, noted that foreign inflows were likely to be affected only if there was a full-blown war.

“The Kargil war in 1999 did not significantly change the perception of the country among foreign fund managers and the same will probably hold true this time around,” he said.—Reuters