Akash Prakash: Why are Indian markets falling?

The Indian equity markets have just completed their worst quarter since 1992, with the broad indices down about 28% in dollar terms and selected mid-caps down between 35 and 40%. Shell-shocked investors are obviously wondering what happened. Wasn't the credit crisis centred in the US? Isn't India supposed to be isolated from the financial system woes of the West? Why is India among the worst-performing markets year-to-date (YTD), and why are we dramatically underperforming other emerging markets?

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