Global financial giant, HSBC has downgraded its Indian stocks to "underweight" from "neutral" due to lack of progress on fiscal reforms, low expectations from corporate earnings and stock prices that are higher than regional counterparts.

The bank has warned that the government must take urgent action in order to avoid affecting the investment climate in the country. “If no concrete measures are taken in the near term it could adversely affect the investment climate,” HSBC said in a note on Wednesday.

The benchmark Sensex of the Bombay Stock Exchange (BSE) have risen 15.5 percent so far this year compared to a 8.1 percent increase in MSCI Asia-Pacific index. The bank said that the MSCI India index is at a 12-month price-to-earnings ratio of 12.7 times, which indicates that there 10 percent discount to its historical average compared to a 15 percent discount for the region.

It concluded that the valuations are less attractive than in other markets such as China. The Indian markets have received$11.8 billion in foreign flows so far this year and the downgrade could trigger a sell off by foreign funds in the Indian market.

The downgrade comes as a shock to some after upgrades from global firms including UBS, Deutsche Bank and J. P. Morgan for the Indian equities earlier in the year.