According to the Securities and Exchange Board of India (SEBI), FIIs had pulled out $ 223.7 million (around Rs 883.7 crore) from the market in the month of May. The FII selling exercise which peaked in April has not shown any sign of ending. The high volatility in the rupee's value against the dollar is also causing concern among FIIs. Although FIIs will benefit from a rupee fall, foreign funds are skeptical about an unstable currency.

Many leading FIIs had reduced their exposure to India recently. After the downgrading of India's outlook by Standard & Poor's, the imminent downgrading of the country's rating by Moody's has now put a spoke on the wheels of FIIs. They allocate funds on the basis of the country's rating. If the rating isdowngraded, then fund flow will also reduce. Moody's and S&P's had expressed disappointment at the "lack of steps" in the budget to address the country's large fiscal deficit.

"The inflationary impact of the budget could lead to a slowdown in demand," said a FII, adding that foreign investors are likely to be disappointed by the lack of specific measures to boost foreign direct investment, especially in the light of sanctions imposed against the country. Besides, there were no specific concessions for the capital market in the budget.