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India’s new budget allays foreign funds' reform fears

REUTERS, Bombay
The much-anticipated budget from India's new, left-backed government has soothed influential foreign fund managers who say they are now looking gradually to increase exposure to Asia's worst performing market this year.
Finance Minister Palaniappan Chidambaram seems to have exorcised fears among asset managers about the continuity of economic reforms after the new government's sweep to power in May sparked a sell-off in Indian financial markets.
Those fears have dragged down the key Bombay share index about 15 percent in the past three months. Foreign funds set a record for monthly sales of Indian shares in May.
"It is looking a lot better than May and the budget has added to the confidence," said singapore-based Michael Marusiak, a portfolio man-
ager at Principal Global that manages about $650 in emerging markets worldwide.
Foreign funds, which own about a 10th of Indian equities, have placed about $3.3 billion into Indian shares this year. They pumped in $6.7 billion last year when Indian shares were Asia's second-best performer -- after Thailand.
Fund managers were encouraged by the government's plans to abolish the long-term capital gains tax and cut the short-term capital gains tax to 10 percent.
"(That) will make it attractive and easier for new foreign investors to come into the country," san Francisco-based Ravin Agrawal, a portfolio manager at Passport Capital, said by e-mail.
Agrawal, who manages about $100 million in India, was bullish on software, pharmaceuticals, consumer goods makers and public sector banks, and said he expected strong earnings to fuel gains on the
Bombay stock Exchange.
Despite fears a planned transaction tax on the purchase of securities would depress trading volumes and increase volatility, most expected only a short-term impact.
Bombay shares rebounded after Chidambaram moved to ease investor fears about the transaction tax to close up 2.1 percent at 4,945.48 on Friday amid signs of foreign buying.
The government's plan to open up further the rapidly growing telecoms and insurance sectors as well as the civil aviation industry is expected to lure more foreign money and spur mergers and acquisitions, analysts said.
India plans to raise 40 billion rupees in the year to March 2005 through asset sales of state firms including Maruti Udyog Ltd, the country's biggest car maker, and unlisted Bharat Aluminium Co Ltd, according to Thursday's budget.