India is growing at its slowest pace in ten years, and the rupee has crumbled below the psychological level of 60 rupees to one dollar.

Despite this there has been little foreign selling of Indian stocks.

In a new report to clients, Goldman Sachs' Sunil Kaul and his team downgrade Indian stocks to underweight.

"The investment case for India has turned less favorable," Kaul writes. "Growth recovery looks elusive, macro vulnerabilities are rising and positioning remains extended.

Here's a quick look at some of the macro factors that motivated the downgrade:

First, economic growth has been sluggish.

Second, there are "no signs of a pick up in investment demand." Goldman also sees further risks to economic growth and in an earlier report downgraded their 2014 GDP forecast to 6%, from 6.4%.

Third, "the external funding environment has become more challenging over the past few months as markets began to price “QE tapering” concerns and rising US yields." And India's current account deficit is adding to its vulnerability.

Fourth, the Indian rupee has weakened against the dollar and is expected to "continue to face depreciation pressures." This chart from Google Finance shows how the rupee has weakened against the dollar over the past five years.

Fifth, they expect the Reserve Bank of India to keep monetary policy tight to help support the currency.

"Our economist thinks that given the vulnerabilities on the external balance of payments, a reversal in policy stance to liquidity easing over the next 3-6 months is a low probability event. We even think that there is a greater probability of the RBI keeping liquidity tight even beyond 6 months, and hiking policy rates as well, rather than cutting them."

Finally, they expect political risk to increase ahead of the 2014 general elections.

Goldman points out that foreign investors haven't heavily sold Indian stocks, but the risk of outflows is high. Indian bonds have however seen foreign selling. " Foreign selling has been more pronounced in Indian bonds which saw outflows of US$ 7bn since early June “taking out” almost all of inflows over the past one year."

"We see further earnings cuts and limited room for re-rating," adds Kaul. "We downgrade India to underweight and recommend investors to stay selective. We favor exporter-facing sectors, strong balance sheet companies and thematic “alpha” trades."