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Will Modi’s latest move boost India stocks further?

An employee walks past an electronic board that indicates the latest stock figures at the National Stock Exchange (NSE) in Mumbai, India, on Monday, May 19, 2014.
Bloomberg | Getty Images
An employee walks past an electronic board that indicates the latest stock figures at the National Stock Exchange (NSE) in Mumbai, India, on Monday, May 19, 2014.

Indian stocks have been on a tear this year and the government's plan to implement its budget early could provide a further boost.

"Comments that the Indian government aims to implement its new budget from 1 April (three months early) should only add to the [positive] sentiment," said Chris Weston, market strategist at IG.

"This [Nifty 50 index] still has great upside potential. Naturally there will be corrections, but buyers continue to step in and pay up for the earnings, with improving fundamentals," he said.

India's Nifty 50 surged 32 percent year to date and is Asia's best performing index. By contrast, the second-best performing index, the Shenzhen Stock Exchange Composite index, is up 28.72 percent, while last year's standout, Japan's Nikkei, is only up 1.5 percent.

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Modi-mania

The election of Prime Minister Narendra Modi in May and his promise to boost India's flagging economy through much-needed reforms underlie India's stock market rally.

In July, Modi announced a budget of structural reforms aimed at reviving growth. A decision to speed up the budget process by three months - announced on Saturday - could see some of these measures rolled out sooner than expected.

"What investors are realizing is that, in a world that is pretty short of growth, you are seeing the best opportunities in India," said Geoff Lewis, global market strategist at JP Morgan Asset Management.

"It's an economy that's turned around cyclically and also we are seeing a positive response to 'Modinomics,'" he said, referring to Modi's plan to unblock stalled infrastructure projects, attract foreign investment and revive economic growth.

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India's economy expanded a faster-than-expected 5.7 percent on year in the April to June quarter, recovering from its lowest growth rate in a decade in the previous quarter.

"If you compare against long-term averages in terms of price-to-earnings ratios, we think the Indian stock market is one of the stories where the fundamentals are still strong, so will be relatively supported," added Lewis.

Stocks on the Nifty 50 index are trading at an average price-to-earnings ratio of 16.62 times earnings.

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Doubts remain

Other analysts doubt that speeding up the budget will greatly impact equity markets.

"The scope for any near-term gains from the budget may be checked because some of it has already been unveiled," said Vishnu Varathan, market economist at Mizhuo Bank.

The external environment poses the greatest risk to Indian stocks' good fortune, he added.

"If we don't see euro zone growth recovering sustainably there could be enough cause to question the optimism on India's prospects," he said. "Obviously the Bank of Japan's move has contributed to the momentum in global equity markets, but if that momentum starts to waver we could see a bit of a pull back."