Bangalore/Singapore May 21 (Reuters): The country’s long-term growth prospects under a reformist Prime Minister outweigh any short-term setback from the incoming government’s retreat on privatisation, big foreign investors believe.

Fund managers with investments in India said they expect domestic bourses to remain volatile until the Congress-led coalition secures its alliance and articulates its economic plan.

But they see promise in the long run.

“The market fall misses the point that the corporate and economic story is still strong,” said Devan Kaloo, Singapore-based fund manger at Aberdeen Asset Management, which has $400 million in Indian assets.

“We have little doubt that over the next 12-24 months the Indian market will outperform the rest of the region,” he said, adding that aside from privatisation and rural focus the new government’s reform agenda would not change.

Even as the fund managers met, India’s Prime Minister-designate, Manmohan Singh, held crisis talks with powerful coalition partners after a dispute over cabinet posts erupted a day before his inauguration.

The 30-share BSE sensitive index reacted to the developments by gyrating within a 174-point range before settling up about half a per cent from where it started the day.

“Most of our managers have basically hedged up their exposure as much as they can,” David Walter, director of London-based hedge fund manager KBC Alpha Asset Management, said at a conference in Singapore.

“There are lot of good cheap companies, but obviously we have to see how the government is going to approach the whole economic situation in India.”

Traders and investors have mainly been focused on whether the new government will follow through on the previous government’s plan to privatise many state-owned companies.

When the rural backlash against the Hindu nationalists swept the Congress-led, communist-backed coalition into power, traders initially panicked. On Monday, the sensex sank as much as 17 per cent from the previous close, its biggest intra-day drop ever, before turning back up.

Prime Minister-designate Singh has since said that only loss-making state firms will be privatised and that state-run banks would remain in the public sector.

“That is a setback...but it takes away only a little bit of the sheen, not all,” said US-based Brad Durham, managing director for fund research at Emerging Portfolio Fund Research.

“A rising middle class and a growth rate that competes with China are just some of the reasons why India is a long-term story,” he said.