India stocks: Is the passion fading?

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After a long run as the emerging market equity sweetheart, investors may be falling out of love with India stocks.

"Prime Minister Modi's victory last May set the stage for a significant amount of reform optimism and encouraged portfolio inflows," HSBC said in a recent note. Now "India is the most over-owned equity market in Asia by mutual funds," it said, citing EPFR data. It cut its rating on the market to underweight from overweight.

"As other markets become more interesting, India could be used as a funding market," HSBC said.

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Funds had flowed into the market in a wave of optimism after Prime Minister Narendra Modi and his ruling Bharatiya Janata Party (BJP) swept into power promising much-needed reforms. Some of those reforms have hit speed bumps recently, with parliamentary bills aimed at making for businesses to buy land and to reform taxes getting deferred earlier this month.

That may cool some of the optimism of foreign investors whose portfolio flows sent the Sensex surging nearly 29 percent last year, with index shedding around 0.6 percent year-to-date.

The vagaries of portfolio flows aren't the only reason HSBC is looking askance at the market, with the bank also citing concerns about earnings.

"India is one of the markets across the region to have witnessed the highest number of earnings downgrades," HSBC said, noting consensus estimates for this year have fallen by more than 5 percent over the past three months.

"Weaker earnings growth expectations will, by definition, alter earnings based valuations for the market. India's price-to-earnings (P/E) valuations therefore remain elevated. India is currently the second-most expensive market in Asia in terms of 12-month forward P/E," it said.

Others are also less enamored of the market.

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Bemoaning that it didn't go underweight sooner, Credit Suisse said it appeared to be "paying the price for not heeding our valuation model."

India equities are among Asia's most expensive, the bank said in a note earlier this month.

"We had overridden our valuation model as we believed India combined rising ROE (return on equity) with falling COE (cost of equity). But the ROE recovery appears to have been delayed," Credit Suisse said.

"With investors asking whether it is time to buy India, we suggest not yet," it said, adding that the market's valuations remain among the region's most expensive and year-to-date foreigners remain net buyers.

To be sure, even as analysts are "taking a break" from their infatuation with India's market, they're still positive on a longer-term view.

"Given the downside risks to growth, heightened uncertainty around inflation outlook and slower than expected progress on reforms, we see risk of a more prolonged corrective phase," Goldman Sachs said in a note Friday. But it added, "We see our longer-term positive view on Indian equities firmly intact and remain overweight India in a regional context."

The country's economy is still broadly expected to improve, with the Asian Development Bank (ADB) in March forecasting growth of 7.8 percent in fiscal 2015-16, up from 7.4 percent in the previous fiscal year, and then rise to 8.2 percent in fiscal 2016-17 as planned reforms start to improve confidence and external demand appears likely to pick up.

-Ansuya Harjani contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter