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"After a very strong three months in which India has been the second best-performing market in the region, and with valuations no longer as appealing, we are happy to take profits," Macquarie said.
The research firm further added that "the uncertainty about the outcome of the election, the potential for a sovereign downgrade, and the fact that the RBI is nearing the end of its easing cycle add to the underweight case."
The equity markets in Asia, excluding Japan, has risen 28 per cent from its lows in March and is now trading up 39 per cent from the October lows of 2008.
Worldwide stock markets witnessed a strong rally in April, with India's benchmark index Sensex surging 17 per cent -- the best in 10 years -- and the Dow Jones World Index jumping 12 per cent, the largest monthly gain since it began in 1991.
There is undoubtedly a structural story in emerging markets, particularly in countries such as China and India.
Macquarie says since Asian markets, generally, mirror the trend of the US economy, which is expected to fall 1.8 per cent, the "shift in relative risk appetite could reverse in the coming weeks and months. If this were to occur, it would indeed be negative for Asian equities."
After a grim performance in the fourth quarter of 2008, the slowdown continued in the first quarter of this year as well. But growth this year should still be quite respectable. Rajeev Malik an economist with Macquarie is currently forecasting 5.5 per cent growth for India.
The International Monetary Fund has scaled down India's growth projections for 2009 to 4.5 per cent from the earlier estimate of 5.1 per cent.
India's resilience is largely because it is a domestic demand driven economy and exports are less cyclical than other parts of Asia. Besides, "the sizeable fiscal boost and aggressive easing of monetary conditions that has occurred and is now working its way through the economy," Macquarie added.
"Polling for the general election is currently underway but the uncertainty over the likely coalition arithmetic and stability of the new government remains high. Consequently, we are happy to take profits at current levels and are downgrading India to an underweight," Macquarie added.
As per market analysts results of the 15th Lok Sabha elections are slated to be announced on May 16. With just two more rounds of voting to go, people in the market would now start playing for results and post-result scenario.