Even as foreign institutional investors are rushing out of the Indian equity markets, there are fresh indications that their selling may accelerate in the coming weeks. During the current year, FIIs have sold shares worth Rs 10,772 crore (Rs 107.72 billion), with the figure for the current month already reaching Rs 2,766 crore (Rs 27.66 billion).

One of the major factors for this pullout is the depreciation in the value of the Indian currency, which slid by 6.38 per cent against the US dollar from the beginning of this year on selling by FIIs. Basically, FIIs seem to have entered a vicious cycle of a depreciating domestic currency causing a fall in the value of their portfolios, forcing them to sell their holdings which, in turn, further weakens the currency.

Other issues concerning foreign funds include the worsening fiscal situation of the country, the inherent uncertainties related to general elections.

According to Citi group's latest report on 'Asia Strategy', "...with emerging capitulation, there is a high probability that we will see additional billions of dollar outflows by Asian funds from now on into the second quarter."

Many funds are facing further mark-to-market losses on their debt portfolios and need to generate cash to provide for such losses. This leads them further into capitulation. Citi group estimates that sell-offs by Asian funds during September and October last year was to the tune of 6.3 per cent of their holdings and, in the last three weeks alone, outflow has reached 2.9 per cent of their total holdings left in the region. In fact, the report added, outflows are estimated to reach October levels.

Commenting on the capitulation, Deven Choksey, managing director, KRC Shares and Securities, said: "Foreign funds are facing a dire need to generate cash to meet their requirements for mark-to-market losses in their portfolios, increasing the selling pressure on them."

Sherman Chan, an analyst with Moody's Economic.com, said: "India's appeal to international investors has weakened considerably in recent weeks. Current economic woes, like lower GDP (growth), have confirmed that this emerging powerhouse is not immune to the global turmoil. And with the general elections coming up soon, which makes the government powerless, India has moved from being one of the most favoured investment destinations to one that requires investors to take great caution. These factors are bad enough to discourage investment in this emerging market for now."

A representative of a leading FII said: "The higher fiscal deficit would put pressure on interest rates and, with the fall in rupee's value, any rise in oil prices would further put pressure on the economy."

In addition to all these, one major concern why FIIs have accelerated selling in the Indian market, as described by Moody's analyst Chan, is "...unsustainable fiscal positions."

"Doubts on the serviceability of public debt - which is equivalent to about 80 per cent of the GDP - have resulted in rating agencies warning of downgrades to junk status. Returning to a such a non-investment grade would mean that some fund managers - bound by investment guidelines - can no longer consider India," she further pointed out.

Rising commodity prices, coupled with the fall in rupee's value, is also emerging as a major concern, and any further fall in rupee's exchange rates could result in a meltdown in the equity markets.

"In that case, the 2,250-level will be breached easily to form a new low. The possibility of that low being below the 2,000 levels on the Nifty spot is fairly high," said Vijay Bhambwani, a technical analyst.