Mumbai: A wave of liquidity flooded global equity markets on Monday, sweeping Indian stocks to a 32-month high.

The benchmark equity index of the Bombay Stock Exchange, Sensex, rose 2.17%, or 408.67 points, to 19,208.33, a level last seen in January 2008. The broader 50-stock Nifty index on the National Stock Exchange gained 119.95, or 2.13%, to 5,760.

Bull run: An LCD screen on the Bombay Stock Exchange building facade displaying stock prices on Monday. Mitesh Bhuvad/PTI

Some analysts attributed the rise to better-than-expected production data from China and India on Friday and lenient norms for banks’ recapitalization. However, most market participants remained bemused by the rise, suggesting that fundamentals don’t quite justify it. They said the rally would continue as long as liquidity continued.

“Liquidity is the only reason behind the rally," Tarun Sisodia, head of research, Anand Rathi Financial Services Ltd, said.

The flow towards stocks worldwide is, in part, being driven by record low interest rates in the Western world. The 2.8% yield on US 10-year bond, for instance, is forcing investors to look towards equities to make higher returns.

Stocks rose across Asian and European markets. The Singapore market, for instance, neared 30-month highs on Monday, driven by liquidity. Its Strait Times index closed 1.5% up on 3,066.81. Hong Kong’s Hang Seng index gained 1.9% to close at 21,658.35.

A 25 August Morgan Stanley and Co. report, citing data collected by EPFR fund research, said cumulative inflows to emerging market equity funds totalled $91 billion ( 4.2 trillion) since January 2009. In India, foreign institutional investors bought stocks worth 2,519 crore on Monday, provisional data from the Bombay Stock Exchange showed.

To be sure, the immediate trigger for the rally could be the positive economic news over the weekend, some analysts said. China’s industrial output rose a better-than-expected 13.9%, suggesting that its growth momentum continues. India’s industrial production index rose an unexpected 13.8% from a year ago in July, against 5.8% a month ago.

Bloomberg cited US government figures on Friday that said initial jobless claims in the US dropped by 27,000 to 451,000 in the week ended 4 September, the lowest in almost two months.

However, such factors are “ex-poste justifications", said V. Anantha Nageswaran, chief investment officer at Julius Baer and Co., and Mint columnist. “I’m not able to figure out who’s buying at these levels."

Indian stocks are trading at high multiples of earnings and “valuations are expensive", said Satish Ramanathan, who helps manage 13,218 crore assets at Sundaram BNP Paribas Asset Management Co. Ltd.

The Sensex is trading at 22.83 times trailing earnings comparable with the 24.47 times in January 2008 when the market reached a record high.

However, with prospects of both global and domestic recovery looking brighter, banking stocks led the rally.

The BSE Bankex index rose 3.62%, followed by the Oil and Gas Index 2.57%. State Bank of India, which rose 5.52% to close at 3,147.25, and Housing Development Finance Corp. Ltd which rose 5.32% to close at 664.15, were the top gainers among the Sensex companies.

“Liquidity has been fairly strong and it’s difficult to forecast which way it’ll turn," said Vetri Subramaniam, head of equity funds at Religare Asset Management Co. Pvt. Ltd, who helps manage 10,584 crore. “The outlook for earnings growth still remains high. We are looking at those numbers to help support the market."

Ashwin Ramarathinam contributed to this story.