The key to any realistic prognosis is, of course, a detailed diagnosis and, in this instance, therefore, a dissection of the factors underlying India's deteriorating macro-economic performance. The answer is relatively straightforward: the dramatic loss of fiscal discipline since the global financial crisis. Any number of statistics can be marshalled to underline the scale of the latter: we select three. First, in the four years to FY2008, the gross government deficit (the combined centre and state deficit plus off-budget items) averaged 5.7% of GDP. In the subsequent four years (FY2009 to FY2012), the gross deficit has averaged 8.4% of GDP. Similarly, in the four years to end-FY2007, net credit to the government sector averaged less than 5%; in the four years to end-2011 has averaged over 26% (Chart 4)! Lastly, and possibly most damning, is that the IMF's latest forecasts anticipate India having the highest general government deficit in the G-20 outside Japan in calendar 2012. For the record, the IMF's forecast is for the deficit to be -8.3% of GDP in 2012 (Chart 5).

Eoin Treacy's view “Governance is Everything” has long been a mantra at Fullermoney. While important when considering an investment in any country, governance regularly tops the list of investor concerns when speaking of India. Over the last few years, India's strengths in the corporate sector have been overshadowed by corruption, bureaucracy and policy paralysis in the eyes of investors. The weakness of the currency has been a particular deterrent for foreign investors and sentiment has deteriorated.

The Nifty Index has performed better than many expected in nominal terms, not least because the Rupee's weakness has acted as a cushion. However, the US Dollar has lost momentum against the Rupee since June and has entered a process of mean reversion. A sustained move above INR56.5 would be required to reaffirm the Dollar's uptrend. The Index needs to hold above 5000 if the benefit of the doubt is to be given to potential for continued higher to lateral ranging.