(Bloomberg) -- As a corporate governance crisis deepens with Indian billionaire Gautam Adani’s business empire, a broader range of assets tied to the world’s fastest-growing major economy are starting to take a hit.

Contagion from the $108 billion wipeout in Adani group’s stocks following a scathing report from Hindenburg Research last week has helped push the MSCI India Index to the brink of a technical correction. The rupee has fallen against all its Asian peers over the period, while the spreads on an index of bonds in the nation expanded to the widest level in four weeks.

The implosion of the Adani companies, which accounted for almost one out of every $10 invested in Indian stocks at the group’s peak in September, has provided a catalyst for investors complaining about the nation’s expensive valuations to trim their holdings. The fallout is likely to make it harder for other Indian corporations to raise funds, put them under increased regulatory scrutiny, while also testing the faith voters have in Prime Minister Narendra Modi.

“This is potentially a bigger problem for Indian equities, which have done so well during the pandemic as China pursued its Covid Zero policy,” said Peter Garnry, head of equity strategy at Saxo Bank A/S in Hellerup, Denmark. “The long-term ramifications could be quite negative.”

The meltdown in Adani shares is likely to hasten the shift of funds toward China as the mainland’s reopening from Covid Zero gathers pace. Positioning also suggests there’s room for further losses, as India has been consistently named as a top overweight in analysts’ research reports over the past year. 

The MSCI India Index is trading at about an 80% premium to the MSCI China Index, according to data compiled by Bloomberg. That’s even after it has tumbled almost 10% from its record high close on Dec. 1, putting it a whisker away from satisfying the definition of a technical correction.

“The Adani-related headlines are generating a high level of negative attention, which could dampen investor appetite for Indian stocks,” said Jian Shi Cortesi, who manages China and Asia equity funds at GAM Investment Management in Zurich. “This could lead to India underperforming other Asian markets such as China, where macro pictures are turning positive and investor sentiment is warming up.”

Global funds have pulled a net $2 billion out of Indian equities in the three days through Tuesday. The outflow has taken place as MSCI Inc.’s gauge of India equities has underperformed a broader Asian gauge by about 15 percentage points this year, set for the widest quarterly divergence since 2004.

For some investors, this year’s decline in Indian shares may be a buying opportunity.

The Adani crisis is a “normal bump” that emerging markets face from time to time, said Hugh Young, Asia chairman at abrdn plc in Edinburgh. 

“We’ve seen countless bumps over the years,” he said. “This one is large, obviously, but we’ve had many even larger. If anything, we’d use weakness to buy.”

Likewise, emerging-market veteran Mark Mobius, who spent more than three decades at Franklin Templeton Investments, said Adani’s woes do “not affect the overall viability of the Indian market and economy.”

India’s economy will withstand the stock rout caused by allegations against the Adani Group, while any impact on the broader equity markets is set to be short-lived, a top minister said Thursday.

Worst Performers

The Adani group’s stocks now make up eight of the worst 10 performers in the MSCI Asia Pacific Index this year. The bonds issued by some of the group’s companies fell to distressed levels in US trading, while the flagship on Wednesday canceled its record 200 billion rupee ($2.4 billion) follow-on public offering of shares.

The challenge facing the Indian authorities now is to limit the damage to investor confidence by pressing ahead with plans to bolster economic growth through infrastructure spending and measures to improve consumption — both of which were emphasized in this week’s budget.

Since Modi came to power, Adani has been the poster child for his administration’s efforts to improve the nation’s infrastructure and domestic manufacturing. The prime minister’s perceived closeness to Adani may weigh on his popularity in the run up to the next general election due to be held before May 2024.

“Things are moving very fast in the market, with a potentially major reassessment of the risks of investing in Indian equities by international investors,” said Gary Dugan, chief executive officer of the Global CIO Office in Singapore. “That reassessment includes governance, corporate transparency, nepotism, and indebtedness.”

--With assistance from Harry Suhartono, Thyagaraju Adinarayan, Subhadip Sircar and Ishika Mookerjee.

(Updates market cap loss in second paragraph)

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