Mumbai: Indian stocks dipped marginally at the start of Wednesday’s trading, in half-hearted acknowledgement of Tuesday’s announcement of slower-than-expected growth in factory output, then gained strongly on continued buying by foreign investors.

Analysts predict further inflows aimed at Coal India Ltd’s (CIL) attractively priced IPO (initial public offering). Another round of quantitative easing in the US and elsewhere should help, they add.

Also See Riding The IPO Wave (PDF)

The Bombay Stock Exchange’s Sensex gained 484.54 points, or 2.4%, to close at 20,687.88 on Wednesday. The National Stock Exchange’s Nifty gained 2.35% to close at 6,233.90.

There “was a big bout of buying by the FIIs (foreign institutional investors) in the morning since the CIL IPO price was considered reasonable," said Deepak Jasani, head of retail research, HDFC Securities Ltd. “There is an expectation that this IPO will bring in more investors. There is a good likelihood that we will see new highs in the coming months." His logic is that higher investor interest bodes well for the markets.

FIIs have so far bought Indian stocks worth a record $21.8 billion (Rs9.7 trillion).

“Foreign inflows are quite strong," said Ullal Ravindra Bhat, managing director of the Indian arm of Dalton Strategic Partnership Llp, a global fund registered as an FII. “There is anticipation of quantitative easing in the US and elsewhere."

Bodies such as the Organization for Economic Co-operation and Development predict a slowdown that will prompt the easing of policy. This will push money into emerging markets as investors chase higher returns, analysts say.

Estimated economic growth of 8.5% in India has encouraged foreign investors, pushing the market to rise the most in 2010 among the world’s 10 largest economies. Year to date, the Sensex has gained 22% in dollar terms, outperforming the MSCI Emerging Market Index, which is up 13%.

This also augurs well for CIL’s $3.5 billion IPO, which opens on 18 October. While some observers term this a watershed event that will set the direction the markets will take because of its huge size, most analysts and investment bankers say there is enough liquidity in the system to fund this IPO and further fuel the rally.

One reason for this is that FII flows are expected to continue, said Nilesh Shah, deputy managing director, ICICI Prudential Asset Management Co. “Lot of money we are getting is from fresh allocations made to India by existing investors. This is likely to continue."

Vikas Khattar, managing director and head of South Asia, equity and equity-linked capital markets origination, for Citigroup Global Markets India Pvt. Ltd, one of the bankers to the IPO, reckons FIIs roughly account for one-fourth of qualified institutional placement in IPOs. For the CIL issue, this works out to under $1 billion, compared with the $7 billion inflows seen in September.

After the 11,700 crore issue of Reliance Power Ltd, the largest in India till now, markets rose 5% in the following month before slumping. After subscription closed for the world’s largest IPO by Petroleo Brasileiro SA that raised $70 billion, the Brazilian markets have gained 4.6%.

Pramit Bhattacharya and Ashwin Ramarathinam contributed to this story.