California Public Employees' Retirement System (CalPERS), the world's largest pension fund with more than $190 billion in assets under management, has downgraded India in its emerging market outlook for 2006.

In a review conducted by Wilshire Consulting on behalf of the investment committee of CalPERS, India's score for 2006 has been cut to 2 from 2.25 last year. India and Sri Lanka were the biggest losers this year while Pakistan and Egypt were the gainers.

The CalPERS investment committee judges an emerging market based on country and market related factors. Political stability, transparency and productive labour practices are the factors on which a country is judged. The fund considers market liquidity and volatility, market regulation, market openness and transaction costs while judging a market.

Both country and market related factors carry equal weights. Emerging markets across the world are assigned scores between a maximum of 3 and a minimum of 1. The investment committee has fixed 2 as the minimum score for making investments in a particular country.

Factor wise change in India's score:

CalPERS is not a very big investor in India as the fund started looking at the country only recently. Though India has managed to barely make it to investment grade, the reduction in scores may affect the quantum of allocation to the country. Since CalPERS is highly influential and its ratings keenly followed, some of the smaller funds may also reduce their exposure to the country.