GUWonder, I went to the South Extension store. I'm likely to visit Delhi again in May and I'll be back to Mehrason's, too.
Generally, I'm cautious about trying to dress like the natives, but before my first trip, in 2004, I did a lot of reading on the Lonely Planet site and the posters there said that the natives actually liked it when a Western woman dressed in a salwar kameez. I realize that the Lonely Planet group is generally tourists and generally younger, but when I showed up at the office in a salwar, several of my co-workers remarked approvingly. I told them they were just as comfortable as business casual and a lot prettier!
I agree that if you're attending a trade show and/or trying to sell goods or services to the locals, you're better off erring on the side of caution and wearing conservative traditional Western business clothes. My situation is probably different because I was meeting with our team of analysts, all of them younger than I am, and I was there for mentoring and training them.
One other thing I wanted to mention to the OP- if you're going to be sightseeing, bring a large silk scarf with you. Some places (such as Humayun's tomb) are religious sites and require you to cover your hair. Mine came in handy when I visited a Sikh gurudwara with my colleagues.