"So long as this does not turn into a full-blown war, it really does not change the investment scenario for us," said Rajiv Jain, who co-manages the $1.2 billion Vontobel International Fund in New York. "In fact, we would view any weakness in the stocks of companies we like as a buying opportunity."

A good monsoon season this year, important for India'seconomy, where agriculture forms about a third of the gross domestic product, bodes well for corporate earnings, investors said.

"The economy looks like it's recovering quite nicely and the micro picture looks quite good," said Arjun Divecha, managing director at Berkeley, California-based Grantham Mayo Van Otterloo, with $1.3 billion in international stocks.

Despite the political uncertainty surrounding parliamentary elections due later this year and theescalating border tensions, India's economy will manage to grow at a real five per cent rate this year, said Joydeep Mukherji, Chief analyst for India at Standard & Poor's, the rating agency.

Pakistan said Thursday it had shot down two Indian jets inthe escalating crisis. Tensions between the two countries rose when India launched air strikes on guerrilla targets in the northern state of Kashmir.

Stocks on the Bombay Stock Exchange lost over two per cent, with the top-30 exchange index down 2.77 percent at 3,863.

Many investors and analysts said the upcoming elections have created political uncertainty, but would not necessarily derail a modestly-improving economy.

"The elections, ironically, may have been a blessing in disguise for the economy. For the first time, everybody knows they will have a government for the next six months," said S&P'S Mukherji. "While the government may not be able to issue new initiatives, it may pass the backlog of economic reforms that were announced earlier this year.(Moreover,) the monsoon, which is good this year, will have a far bigger impact." S&P Would maintain a stable outlook on India with a double-B rating, Mukherji said.

Many foreign investors prefer consumer-oriented stocks that would benefit from a rise in consumer demand, including companies like ITC Ltd. and Bajaj Auto.

Despite the bright prospects for many companies, some money-managers concede their overall asset allocation remains low due to India's fractured political system, which has kept economic liberalisation and growth moderate at best.

India will hold elections in September after the ruling Bharatiya Janata Party lost the support of a key minority partner last month.

Divecha at Grantham Mayo said his investments in India are currently at two percent of assets.