"Market sentiment in India has taken a sharp turn in recent weeks. Optimism seen a few months ago may have completely evaporated as the important GDP data released late last week confirmed that the emerging powerhouse is not immune from the global turmoil," said Moody's Economy.com, a subsidiary of Moody's Corp.

"Worse still, the government now appears powerless in combating the economic downturn. Instead, the fiscal position has become an additional problem for the economy," said the report written by Moody's economist Sherman Chan.

Late last month, rating agency major Standard and Poor's revised its outlook on India's long-term sovereign credit rating from stable to negative, while warning of a possible downgrade in the rating itself.

A number of others, including Moody's and Fitch have warned of a possible downgrade action on sovereign ratings if New Delhi's fiscal deficit widened further.

Fiscal deficit is projected to double to six per cent of GDP this fiscal from the earlier projection of 2.5 per cent.