The going could be tough for bourses in Asia, including India, in 2008 with global financial services major Citigroup saying the stock markets in the region are overvalued by 25 per cent and they are set to face challenging conditions in the New Year.

According to global financial services provider Citigroup's outlook for 2008, the high multiples, declining liquidity and overbought Asia (excluding Japan) markets suggest 20-25 per cent downslide in 2008.

Talking about India the report said, "The country may find the next year a little challenging with foreign inflows dropping off after new P-notes rules along with a temporary setback, if the national elections scheduled for the second quarter of 2009 is held next year."

"Valuations are certainly not cheap after a run-up spanning over four years, but they also are not as expensive as they look, once embedded asset value is accounted for," the report also said.

"Returns are unlikely to be as spectacular as in recent years, but we believe a constructive stance is still justified given the growth momentum," Citigroup head of India research Ratnesh Kumar said.

Besides, in the overall Asian region high multiples in overbought markets, based on excessively optimistic expectations, are neither healthy nor sustainable, Citigroup believes.

"...compared with both emerging and developed markets, Asia is some 20 per cent above the fair-value line," it said.

For India, Citigroup sees about nine per cent growth in gross domestic product (GDP) sustaining through financial year 2008 and FY09. It also expects some rate cuts in early 2008 in India, which would help the markets.

The fiscal deficit could continue to improve, with inflation well managed as the high oil prices are still not reflected in retail prices and Wholesale Price Index (WPI) and the banking sector comfortably liquid, we expect small rate cuts in India starting early-2008, it said.

Huge capital inflows which are driving a rapid and above-expectation appreciation of the rupee had been a major concern since July 2006. "The rupee would continue to appreciate, we believe, albeit at a much slower pace, due to moves to control capital flows (curbs on external debt, P-notes)," the outlook said.

The nine per cent GDP growth is expected to drive the top-line growth of around 15 per cent in coming years, with stable margins and expansions or new businesses sustaining earnings growth of at least 20 per cent.

Though not as spectacular as the 30 per cent-plus growth of the previous five years, it would still position India as a high-growth emerging market, the report said.

Highlighting capex and urban consumption as two of the key growth drivers for India, the report said, they are likely to gather further momentum.

"Even though capex has risen in recent years, we still see India as being in the very early stages of a prolonged capex boom, given the spending catch-up needed in infrastructure sectors like power, ports, airports and roads, " Kumar said.

Besides, strong consumption is likely to be underpinned by rising wages, rapid growth creating new jobs, favourable demographics and high consumer confidence.

Another key growth driver for the country is outsourcing, which has faced a major roadblock from rapid currency appreciation and concerns about a US slowdown. We expect the rupee to appreciate much more slowly in 2008, which should help this segment regroup.