By Rafael Nam and Neha Dasgupta
MUMBAI (Reuters) - India's shares and bonds were headed for one of their worst weeks of the year on Friday as fears of a drought add to a growing list of risks facing a country that until recently had been one of the world's best emerging market performers.
A drought could reduce chances the Reserve Bank of India will cut interest rates again after it eased the repo rate by 25 basis points on Tuesday, even as the economy is struggling.
Sluggish demand has been cited as a key reason why large and midcap companies missed their earnings forecasts by 5 percent in the year to March, the third biggest miss in Asia-Pacific countries tracked by Thomson Reuters.
Other challenges facing investors in India in coming months include court hearings over the summer on a controversial minimum alternate tax (MAT) on foreign investors. And, parliament is due to start its next session by early August with several key bills, including one on land acquisitions, facing uncertain prospects.
"India had promised a lot, but actual numbers across all fronts, be it corporate earnings or actual GDP growth has been terrible to say the least," said Shankar Sharma, a noted contrarian investor in India who is vice chairman of financial firm First Global.
Data last week showed India outpaced China by growing 7.5 percent in the March quarter, but many economists and the central bank itself say the economy is not doing as well as the recently-recalculated GDP numbers suggest.
The benchmark BSE Sensex was down 3.8 percent for the week, heading for its second worst weekly fall of the year since late April.
Benchmark 10-year bond yields surged 20 basis points (bps) this week, the most since April 2014.
The BSE Sensex has now gone from being the third-best performer in Asia in dollar terms to its second worst this year, falling around 2.7 percent so far in 2015.
Some analysts believe markets have peaked. HSBC has set its December target for the BSE Sensex at 26,900, or 10 percent below the record high hit in early March.
Markets are seeing other warning signals. Midcaps and smaller firms - especially in the debt-laden infrastructure and property sectors - bore the brunt of this week's sell-off, in a sign that investors are shedding riskier assets.
Foreign investors - the pillars of the rally in India last year - have offloaded a net $2.9 billion in shares and bonds since the start of May after buying for months.
Meanwhile, the proportion of pledged shares by company promoters rose to 4.31 percent from 4 percent in July-September, according to a report last week by Ambit Capital, which called it a potential sign of stress that could signal financing problems by these stakeholders.
More broadly, investors cite a sense of disappointment after a rally driven by optimism sparked from the election of Prime Minister Narendra Modi in May 2014.
"For the first year of Modi government, perhaps expecting a lot of things to be delivered was not correct," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.
(Editing by Kim Coghill)
