Having burnt their fingers badly, investors are set to give a wide berth to Indian shares until clear signs emerge of a turnaround to shrinking econ-omic growth, which has taken a heavy toll on market confidence. Fund managers, especially at large foreign institutions who are trend-setters for the market, are overwhelmingly downbeat. This means asset allocations to India in the New Year will be lukewarm. The top-30 Sensex tumbled almost a quarter in 2011, the second steepest slide in two decades and giving it the dubious distinction of bringing up the rear end among the world\'s major stock market performers. The slump was the first yearly fall since 2008, when a global economic meltdown triggered by the Lehman Brothers collapse sent the Sensex plummeting a record 52.4 per cent. \"Markets are driven by perception,\" said equity salesman Harish Dave. \"Business confidence has hit rock bottom, the economy is losing momentum and the government is in disarray.\" With the announcement of elections to state assemblies, including the politically important Uttar Pradesh, over the next three months, the central government cannot undertake any policy decisions to rejuvenate the economy because these can be construed as influencing the polls. The Sensex, which dropped 6.1 per cent in October-December, has slid for four quarters in a row as a record run of interest rate increases by the Reserve Bank of India — 13 rounds between March 2010 and October 2011 — strangled spending and dented corporate earnings. Fall in inflation The RBI paused last month and acknowledged the tight-fisted monetary policy was hurting the economy, and a sharp drop in food inflation to 0.4 per cent in mid-December — the lowest in nearly six years — gives hope the headline inflation for the month could drop below eight per cent after remaining above nine per cent for a year. Cooling prices could prepare the ground for the RBI to start cutting rates next year, but the damage may have already been done. With the economy seen struggling to expand by at least seven per cent in 2011-12, in sharp contrast to nine per cent rise forecast in February by the government, the outlook is bleak with many large projects on the backburner due to high borrowing costs, delays in government approvals and cumbersome land acquirement rules. \"We remain bearish on the overall market, with downside risks to both multiples as well as earnings,\" Ashish Gupta, head of equity research at the Indian arm of Credit Suisse, said in a note. He said slowing economic growth will drive earnings downgrades as companies battle sluggish demand. The consensus earnings forecast for Sensex companies for 2012-13, which has dropped seven percentage points to 16 per cent, is likely to be further lowered, he said. Rating agency Crisil said profit margins of companies would shrink by 200 basis points on average to 17.7 per cent in the Dec-ember quarter because of slower volume expansion, high raw material and interest costs and limited ability to raise prices. Textiles, real estate and hotel companies are likely to see 300-500 basis points fall in profit margins, it said based on a study of companies across 21 industries, excluding banks and oil companies. \"The near-term outlook is bearish,\" said Dave. \"The rupee could head towards 60 against the dollar before it stabilises. Eventually, it will pull back, but that will be in the second half of next year.\" Rupee: renewed pressure Adding to the gloomy prospects is the rupee\'s 16 per cent fall this year, which has magnified the losses for foreign investors in Indian shares. The currency\'s drop is the worst among its peers in emerging markets and the biggest in three years. The rupee will come under more downward pressure because of a widening trade deficit and dwindling capital inflows. The RBI has been actively intervening by selling dollars from its stockpile to slow the rupee\'s depreciation.