For years, despite the lack of earnings growth, the absence of credit growth and the dire straits of many state-owned banks, investors took comfort from India’s improving macro indicators.

A narrowing fiscal deficit, a lower current account deficit, low inflation, and a slew of reforms such as the bankruptcy law and the goods and services tax (GST) burnished India’s image among investors. The macro story was the one that lured them.

But some of these macro numbers are faltering now and it is increasingly being realized that structural reforms take time to work. This is making investors jittery.

Other factors have added to the nervousness. The US Federal Reserve’s hawkish monetary policy stance and decision to begin its balance-sheet reduction programme next month, coupled with rising geopolitical risks are weighing on investors’ sentiments.

But for India, apart from global factors, fears of a widening fiscal deficit due to a likely fiscal boost have added to the worries. Little wonder then that Indian markets are taking a harder hit than other emerging market peers.

“With the government now expected to announce a fiscal stimulus to boost the economy, there are worries among a section of investors about the government’s continued commitment to the medium-term fiscal consolidation plan. Announcement of a huge fiscal stimulus will strain the combined fiscal deficit of the Centre and states, and will impact India’s desire for an upgrade in its credit rating. Thus, market participants are worried that India’s macro story that was seen on a strong footing is now showing signs of weakness," said Ajay Bodke, chief executive and chief portfolio manager at brokerage firm Prabhudas Lilladher Pvt. Ltd.

The demonetization shock and an ambiguous GST implementation have taken a toll on consumption. Private capital expenditure is also unlikely to pick up anytime soon and export growth is elusive. There is little to cheer on the revenue front, since tax collections from GST have been lower than expected so far.

Moreover, a corporate earnings revival is not in sight at least in this fiscal year.

Despite this, valuation of the Indian equity market is not cheap by any means. As the accompanying chart shows, though valuations have come off a bit, India remains an expensive bet.

Nevertheless, the liquidity cushion from domestic investors in the form of systematic investment plans is likely to continue. That is why some market analysts do not foresee a significant correction in the near term. On the other hand, foreign institutional investors remain net sellers of Indian equities in FY18 until now.

Simply put, if India’s macro story starts fraying, investors will start to wonder what it is that justifies the market’s high valuations.