Shares trading near 10-month highs are on a roll and could see more gains as investors pour money back into the South Asian country, analysts say.
Stocks are already among the top-performing emerging markets this year as financial institutions and overseas funds bet on robust growth in Asia's third-largest economy.
On Friday, shares closed at 15,103.55 points, their highest in nearly 10 months. The strong run has been driven by signs of tentative economic recovery and given an additional powerful boost by the re-election of India's centre-left Congress party last month.
"Six months back investors were asking, 'How do I exit?' Now their mentality is, 'Where do I get in?'" Sonam Udasi, vice-president of Mumbai brokerage BRICS Securities said.
The Congress was returned to power with its biggest seat tally in 18 years. Analysts called the mandate a "game changer" as it allows the Congress to rule without the support of the communists who opposed economic reforms during the last term.
In the first week of June, global investors pumped 199 million dollars into India-focused equity funds according to data compiled by international fund tracking firm EPFR Global, the highest sum in the last 55 weeks.
India's benchmark 30-share Sensex index has jumped nearly 57 percent for the calendar year and analysts believe it is headed still higher. Stocks fell 52 percent in 2008 due to the global financial turmoil.
"The rally is not likely to fizzle as retail investors and local funds are still to step in," said Suhas Samant, a fund manager at brokerage Sharekhan, who forecasts the Sensex will hit 17,000 points by December.
"There's huge money on the sidelines," he added. Local funds are estimated to hold cash of 100 to 150 billion rupees (two to three billion dollars) which could be ploughed back into the markets. "The rally is driven by high liquidity and rising expectations of government stimulus bringing growth back on track," said Nischal Maheshwari, an analyst at Edelweiss Securities.
Government promised last week to focus on spurring growth to counter the effects of the global slowdown.
The government has said the drive to restore growth to at least nine percent, the level seen before the financial crisis, would be accompanied by public investment to overhaul India's dilapidated infrastructure -- seen as a key hurdle to expansion.
The government has said it will also further open up the economy to encourage overseas investment and begin stake sales in public sector firms. The economy expanded by 6.7 percent in the fiscal year to March 2009, down from nine percent a year earlier, and the central bank is targeting expansion of six percent this year.
But analysts are already pointing to signs of economic "green shoots", noting improved domestic car sales and cement dispatches. Economy expanded by 5.8 percent in the last quarter of the fiscal year to March 2009, beating forecasts of 5.0 percent, boosted by government spending.
The surprisingly strong performance prompted analysts to say the worst may be over for India. Fresh overseas fund inflows have led to a sharp rise in the rupee which has risen nearly 10 percent against the dollar in the past four months.
"The markets are riding on an Asian momentum, led by a boost in liquidity and risk-appetite," said Apurva Shah, head of research at Prabhudas Lilladher.