The positive momentum in India’s business cycle looks like it was not sustained in March. The OECD’s composite leading index (CLI) remains in the recovery zone, but its rate of increase waned.

We expect this loss of momentum to continue in April due to weak car sales and lower stock prices. After a brief pickup in activity levels in late 2011/early Q1 2012, the momentum seems to be slackening going into Q2.

There have been times when slowing momentum gave way to an upturn, but India faces two big challenges. One is the current account and fiscal deficits and weak investment feeding off each other. We are yet to see decisive action from the government to suggest that India is moving towards a ‘make’ rather than a ‘break’ moment.

The re-emergence of the euro area crisis and recent weakness in Chinese data suggest downside risks to the global economy. Given India’s twin deficits and fragile recovery, weaker external demand can trigger non-linear effects, such as capital flight, exacerbating the slowdown. We see downside risks to our GDP growth forecast of 7.4% year on year in FY13 (year ending March 2013).

Meanwhile, FDI into India has risen exponentially since the 2000s. However, over the past three years some of this money is being repatriated. After keeping their investments broadly intact until 2008, MNCs repatriated US$3.1 billion in 2009, US$7.2 billion in 2010 and a peak of US$10.7 billion in 2011.

Sector-wise details are not available, but we judge that the services and real estate sectors have probably seen the maximum outflow. In our view, both push and pull factors are responsible. Global deleveraging may have forced companies to sell their Indian assets and repatriate funds to their home country.

At the same time, domestic push factors such as slowing potential growth, the high cost of doing business and regulatory uncertainty have weakened the investment climate, likely causing this erosion. This is not a good sign.