Overseas institutional investors have pumped billions of dollars into Indian equities over the past year, fueling a seemingly unstoppable rally, but signs suggest that foreign interest may be peaking, according to analysts.
"Our interactions with 80 investors in the USA suggest FIIs' (foreign institutional investors) incremental interest in India is near a short-term peak," Mahesh Nandurkar, India equity strategist at CLSA wrote in a report published on Tuesday.
There is growing unease about weak corporate earnings, says Nandurkar, which will unlikely see a meaningful recovery for a couple more quarters.
Furthermore, big-bang reforms including the passage of the land acquisition bill and goods and services tax (GST) bill appear to be some time away, he said.
"While there is a general agreement on the attractiveness of India's structural long-term story, several investors appeared to be seriously re-evaluating their positioning and incremental inflows seem unlikely in the near term," Nandurkar said, adding that the risk of a near-term pull-back in the market is rising.
After scaling fresh highs earlier this month, the rally in the benchmark Sensex stalled in recent weeks amid concerns about a lack of catalysts. The index is down 4 percent so far this month, but remains up 2.5 percent year to date.
"With a good budget and two surprise rate cuts now behind us, the only macro triggers to look forward to in the near term are potential passage of the land bill and visible progress on the GST bill," said Nandurkar.
Earnings in focus
Sanjeev Prasad, senior executive director and co-head of Kotak Institutional Equities has also noticed a growing concern among investors, particularly around the weak earnings trend.
In the October-December quarter, earnings of India's largest companies failed to meet expectations. The combined net income of 100 firms with a market valuation of more than $100 million dropped 6 percent in the quarter from a year earlier, according to Reuters. That compares with a 0.5 percent rise forecast by analysts covering the companies.
"Investors are questioning how quickly the country's macro improvement will translate into better earnings," Prasad told CNBC.