As Indian shares hit record high, doubts abound about rally

Punit Paranjpe| AFP | Getty Images

India's benchmark BSE index surged to a record high on Friday as blue chips rallied on the back of strong foreign buying, marking a remarkable turnaround from two months earlier when the rupee fell to record lows and threatened a crisis of confidence.

The index, also known as Sensex, has been propelled by around $3.5 billion worth of foreign inflows since the Federal Reserve unexpectedly delayed tapering of its monetary stimulus at a meeting on Sept. 18.

(Read more: Soaring India stocks have strategists on edge)

The foreign buying comes amid tentative signs the economy may be improving after posting its slowest growth in a decade, though analysts still widely expect challenges ahead as the central bank raises interest rates to curb stubbornly high inflation.

That has made some investors cautious about whether the rally can be sustained.

India IT will benefit from global recovery

"I am not too pleased with the way fundamentals are shaping up. This new high is driven by only a handful of stocks which are hopelessly expensive despite fundamentals," said Phani Sekhar, a fund manager of portfolio management services at Angel Broking.

"The liquidity rush is making people accumulate stocks. If fundamentals don't improve or liquidity tapers, then this rally won't have many legs."

The benchmark BSE index rose to as high as 21,293.88 points, a 0.6 percent gain for the day, and surpassing the previous all-time high of 21,206.77 points on Jan. 10, 2008.

The index has gained 22 percent since hitting a yearly low on Aug. 28.

(Read more: Four major emerging nations face crucial elections)

But despite the record high, the Sensex still remains Asia's fourth-worst performer this year in dollar terms among the exchanges tracked by Thomson Reuters, with a 2.5 percent fall.

The returns have been hurt by a weak rupee, which hit a record low of 68.85 in late August, that had sparked concerns about a currency crisis in the country.

Analysts say the strong foreign buying reflects in part tentative signs of improvement in the economy. Data on Thursday showed India's infrastructure sector output last month rose at its fastest clip in a year.

(Read more: Onion crisis leaves trail of tears across India)

Meanwhile, measures to stabilize the rupee undertaken by new Reserve Bank of India Governor Raghuram Rajan, including providing dollars directly to oil companies, have also helped.

Still, analysts expect the economy to stay weak.

The World Bank last month slashed its growth forecast for Asia's third-largest economy to 4.7 percent in the year ending in March, below the decade low of 5 percent in the previous fiscal year.

India's central bank also raised interest rates by a quarter percentage point for a second consecutive month in October to fight accelerating inflation.

Blue chips have been gaining nonetheless. India's broader NSE index rose 0.2 percent, also within sight of a record high that was set on Jan. 8, 2008.

State-owned banks gained for a second consecutive session on Friday on hopes of stabilising asset quality, sending State Bank of India Ltd up 2.3 percent.

Hero MotoCorp gained 2.3 percent ahead of its October sales later in the week.

Dr.Reddy's Laboratories shares gained 0.5 percent after it September-quarter consolidated net profit rose by 69 percent to 6.90 billion rupees.