Investor sentiment in India has turned extremely cautious, and outstanding open interest in the F&O markets is down about 65%. FIIs have sold about $3 billion YTD, and even local flows into mutual funds and insurance ULIPs have slowed down.

There is a general sense of unease and nervousness and I know of very few people who are willing to commit fresh capital. The market, once seen as expensive, trading at over 20 times forward earnings, is now 15 times March '09 earnings, and, if you make a couple of adjustments for embedded value, about 12.5 times. At 12.5 times, the market is pretty much at its long-term average valuation multiple, and for a near 20% RoE, not outlandish. Yet nobody has the confidence to buy today.

Just three months back we were invincible, growing at 8-9%, insulated from the US and full of confidence. But all this confidence has now evaporated.

To understand the markets' poor performance, one can point to the obvious factors of global risk aversion and de-leveraging across all markets and asset classes. India had also had a dream run over the past few years and was thus seen as expensive, over-owned and a good source of profit.

We also have an economy which is clearly slowing, though still likely to grow at between 7 and 7.5% in 2008-09, and in tune with most other emerging economies we have a growing inflation problem. The above issues are well-known and pretty much common across most large emerging markets.

I think India has lost out in two areas -- first, the transparency and predictability of corporate earnings, and, second, government action.

One has to accept that the Indian corporate sector has hardly covered itself with glory in terms of disclosures and transparency over the past few months. We now have evidence of banks punting the IPO markets and showing it as normal earnings, numerous companies punting FX markets and now trying to pretend they were mis-sold these exotic derivative structures as the trades go bad, respected companies booking commodity losses, etc.

There is a general sense of mistrust around company earnings, especially for the banks, and the more aggressive mid-caps and most investors are braced for March 31, 2008, balance sheets and whatever surprises may be in store there.

We have also seen many of the investor favourites (in the capital goods and power sectors, particularly) disappoint on execution and margins. Despite having solid order backlogs and supposed earnings visibility, these companies have not been able to deliver on very high investor expectations. In every sector, investors can now find reasons as to why earnings will disappoint.

For consumer-facing sectors, the high and expected rising interest rate environment will dampen demand. For manufacturers, rising input prices will crush margins, for exporters the rupee is a huge problem. For commodity producers, the government seems determined to kill their pricing power and anyone with capital markets exposure is toast.

Anyone in need of raising fresh capital like the real estate boys is perceived to have little chance of either raising the money or making their numbers. Banks are faced with slowing loan growth and rising NPAs. Investors also now fret about negative operating leverage as growth slows.