FUND VIEW - Bet on India banks, realty; shun resources - ABN AMRO

By Nishant Kumar

MUMBAI (Reuters) - Investors in Indian shares should keep away from resources and bet on battered bank and realty stocks as falling commodity prices will douse inflation, soften interest rates and boost earnings, an ABN AMRO fund manager said.

K.C. Reddy, chief investment officer of ABN AMRO Asset Management (India), said demand for commodities was set for sharper falls on the back of a slowing world economy, including in China where he expected growth to slip into single digit in the second half.

Reddy, who overseas about $2 billion, nearly halved his metals exposure and dumped the entire 5 percent holding in the steel sector in his largest stock fund in June.

A contracting Japanese economy and slumping exports from Asia would add to the gloom for commodities, but the fall in prices would moderate inflation and benefit Indian banks and realty shares, he told Reuters on Wednesday.

"Valuations across these sectors are at historical lows," said Reddy, who in June added State Bank of India and ICICI Bank Ltd, and built a fresh 7.9 percent position in the housing and construction sector in his opportunities fund.

Banking stocks had already factored in a 40 percent decline in earnings, while shares in many real estate firms were trading at their 2003/04 levels on fears of spiralling inflation and rising interest rates, he said.

India's annual inflation was nearly 12 percent in mid-July, driven largely by high oil and commodity prices.

Reddy said the pace of inflation was flattening and interest rates were close to their peak in India as well as globally.