Continued selling by foreign institutional investors (FIIs) amid tax concerns has cost India the most favoured emerging market (EM) tag in April.

Foreign flows into Indian stocks so far this month are $1.8 billion, much lower as compared to peers South Korea ($3.9 bn), Taiwan ($3.4 bn) and Brazil ($2.3 bn), show data from Bloomberg.

Month-to-date FII flows into Indian stocks are much lower if one excludes the $2.6 bn of flow due to the Sun Pharma share sale.

On a year-to-date (YTD) basis, however, India is still the top-grossing EM (for which data is available) in terms of FII inflows for 2015, thanks to the investments in the year’s first three months.

Data for foreign flows into the Chinese market isn’t available. However, given a sharp 40 per cent rally in its benchmark Shanghai Composite Index, their flows from abroad are likely to be much more than India.

In the past fortnight, FIIs have been net sellers on all trading sessions, barring one. If not for the Sun Pharma deal, FII selling in the past 11 trading sessions is a cumulative $1.2 bn.

Market experts believe the retreat is due to the uncertainty created by the government over subjecting foreign investors to tax on capital gains made in the past few years.

“The uncertainty regarding the government and courts’ stand on the application of Minimum Alternate Tax to FIIs retrospectively has created volatility in the market,” says Edelweiss in a report. The income tax department has issued notices to FIIs demanding 20 per cent MAT on earlier capital gains.

The market was already being impacted by poor corporate earnings announcements and the prospect of a weak monsoon. The YTD returns for the benchmark Sensex, up as much as eight per cent earlier in the year, has slipped into negative figures and is currently one of the worst performers among major global markets.

In its Asia-Pacific strategy report, Nomura Global Research says India now has the worst performing market and currency due to “concerns about stalling reforms, a potential growth shock from poor monsoons and investor-unfriendly tax policy developments.” On the other hand, South Korea has witnessed record flows after it surprised on the upside with its first quarter growth numbers.

Market experts believe a resolution to the FII tax issue is needed to improve investor sentiment.

Piyush Garg, chief investment officer, ICICI Securities, says: “Sentiment is bad, and if the land bill and the one on a goods and services tax are not passed, there would be a question over policy momentum....The most positive trigger for the market would be for the FPI-MAT issue to be resolved.”