Investors have turned bearish on India despite government forecasts of nine percent economic growth, as concerns over widespread corruption and high inflation knock confidence, analysts say.
Only a few months ago investors were pouring into Indian equities, seeing the country as a promising high-growth market and talking about the "India story". But now the mood looks to be on the turn.
The government's lack of progress on economic reform, massive corruption scandals including the cut-price sale of telecoms licences, and eight interest rate hikes to try to tame high inflation have all had an impact.
Citigroup economist Rohini Malkani said she had met some 50 investors in Singapore and Hong Kong this month and about 70 percent were "bearish on India".
Fears about reduced investment in infrastructure, high inflation and the fallout from political scandals topped the list of investor worries, she said.
The Bombay Stock Exchange Sensitive Index or Sensex has dropped more than eight percent this year, making it Asia's worst large market performer -- after it climbed 17 percent last year on the back of ê29 billion poured in by foreign investors.
Foreign institutional investors sold ê2 billion worth of shares in January and February.
"Concerns about stubbornly high inflation pushing up interest rates, a high current deficit fuelled by higher oil prices, and corporate and government corruption scandals have all contributed to the selling," said Deepak Lalwani, head of London-based, India-focused investment consultancy Lalcap.
Market analysts expect that for the first half of 2011 at least, shares will continue to slide as the challenge of maintaining growth while cutting inflation, now at 8.3 percent, proves increasingly tough.
India's central bank, the most aggressive in Asia in tightening monetary policy, lifted its benchmark borrowing rate to 6.75 percent this month -- its highest level in three years.
While the government projects nine percent expansion for the next fiscal year starting April 1, most economists' forecasts are lower amid expectations the bank will raise rates further by as much 100 basis points, slowing investment and growth.
Credit Suisse economist Robert Prior-Wandesforde said he believed growth could decelerate to 7.7 percent next year from 8.6 percent in the current year as resurgent oil prices and rate rises take their toll.
Citigroup's Malkani said she had pencilled in a "relatively optimistic 8.4 percent" growth forecast but calculates that expansion under a worse-case scenario could be just 7.2 percent if investment were to slump sharply.
On top of economic worries, concerns about governance loom large, with Prime Minister Manmohan Singh portrayed by the opposition as a weak leader presiding over a corrupt administration.
Global consultancy KPMG said in a report that "corruption could be a major hurdle in India's growth story in the coming decade".
"From what started as petty payments demanded by babus (civil servants) during the license raj days, corruption has taken a much larger form and scale," said Deepankar Sanwalka, KPMG India's head of risk and compliance.
"It is not about petty bribes or 'bakshish' any more, but scams to the tune of billions of dollars that highlight a political-industry nexus which if not checked could have a far reaching impact."
At the heart of corruption concerns is the once high-flying telecoms sector, with an ex-telecom minister alleged to have cost the treasury up to ê40 billion by selling off mobile licences at low prices in exchange for kickbacks.
Graft is also rampant in property and construction, KPMG found.
"The corruption scandals which have paralysed government have tainted India's image as an investment destination," said Lalcap's Lalwani.
"But foreign investors may benefit from many Indian businessmen's observation over the years that the country continues to grow -- despite the government."