Mumbai: Indian stocks rose more in the first 100 days of Prime Minister Manmohan Singh’s leadership than under any new government since 1991. Investors predict more gains as he opens up the world’s second fastest growing major economy.

Upward march: The BSE building in Mumbai. The advance seen in the market since the UPA won its second term is the biggest since the 40% rally witnessed after P.V. Narasimha Rao came to power in 1991. Abhijit Bhatlekar / Mint

The Bombay Stock Exchange’s sensitive index climbed 16% since Singh started a second term on 22 May as international investors bought $4.9 billion (Rs23,961 crore) more shares than they sold, data compiled by the bourse show.

The advance is the biggest since the 40% rally after P.V. Narasimha Rao came to power in 1991, and compares with the 8.4% increase for the Standard and Poor’s 500 in the first 100 days of US President Barack Obama’s administration.

Investors are optimistic Singh will accelerate road construction, ease limits on foreign ownership of banks and sell stakes in state companies. The economy may grow 9% annually in the coming three years, pushing the benchmark index beyond the record high of 21,206.77 reached in January 2008, according to Mirae Asset Financial Group, South Korea’s biggest money manager.

The Sensex is 26% below that level, falling 255.70, or 1.6%, on Monday to 15,666.64.

“India is well positioned to play the global recovery story," said Gopal Agrawal, head of equities in Mumbai for Mirae, which has $2.5 billion invested in India and favours automobile, metal and oil stocks. “The policy framework is in place and we have to see how it’s executed and how the people will benefit."

The Sensex may reach 20,000 by March 2011, UBS AG analyst Suresh Mahadevan wrote in a 26 August report. He advised buying Mumbai-based Tata Steel Ltd, the nation’s largest producer, and Mumbai-based JSW Steel Ltd, the third-biggest.

India’s economic growth accelerated for the first time since 2007, indicating the global recession’s impact on Asia’s third largest economy is waning.

Gross domestic product (GDP) expanded 6.1% in the three months to 30 June from a year earlier after a 5.8% rise in the previous quarter, the Central Statistical Organisation said on Monday. Economists expected a 6.2% gain.

Singh, 76, was educated at Oxford University and was governor of the Reserve Bank of India from 1982 and 1985.

He was Rao’s finance minister and championed free market policies such as cutting import tariffs and opening the stock market to foreign investors. In 2004, he became the fourth prime minister to run India since Rao.

His coalition was re-elected in May with a majority large enough to separate from Communist allies, who had blocked plans for asset sales and the scrapping of a 10% cap on the voting rights of foreign investors in non-state banks.

Selling shares in state-owned companies is vital to fund the budget deficit, forecast by the government to swell to 6.8% of gross domestic product in the year ending 31 March, from 6.2% last fiscal year.

Oil India Ltd, the nation’s second biggest oil explorer, plans to raise as much as Rs2,700 crore by selling a 10% stake to the public starting 7 September, according to finance director T.K. Ananthkumar. NHPC Ltd, the leading hydroelectric power generator, is seeking Rs4,000 crore in an initial public offering that started this month, chairman S.K. Garg said.

“The government is going ahead aggressively with reforms," said Pauli Laursen, a fund manager who oversees $150 million of Indian equities at SydInvest Asset Management in Copenhagen. “The IPO of a company like Oil India is a positive."

Lower monsoon rainfall may undermine the rally by reducing farm output, according to Bank of America-Merrill Lynch, which predicted in a 17 August report that the Sensex could slide as much as 15% in coming months. India’s goods exports, which account for 15% of GDP, fell for a ninth month in June.

“We don’t see the level of confidence in emerging markets that we have been used to and India is no exception," said Gavin Redknap, a strategist in London for Tokyo-based Nikko Asset Management Co., which oversees $6 billion in developing nations. “We aren’t seeing Indian equities at a level where we can call them attractive."

The economy may expand faster than China’s next year because investors underestimate manufacturing and service industry growth, Puneet Nanda, an executive vice-president at ICICI Prudential Life Insurance Co., with $6 billion in equities, said in an interview.

Economic growth may exceed 7% in the fiscal year to 31 March, and as much as 10% in the following year, Nanda said. China may expand 7.2% this year and 7.7% in 2010, the World Bank forecast on 22 June.

The rupee, which dropped 3% in the past three months, may strengthen by at least 5% to 46.22 per dollar by 31 March, from 48.82 on Monday, according to the median forecast in a survey of 20 analysts by Bloomberg.

Funds set up to target Indian stocks have attracted $1.2 billion more cash than was withdrawn since 1 June, with nine consecutive weeks of inflows, according to Cambridge, Massachusetts-based research firm EPFR Global.

Stocks in the Sensex trade for 18.7 times estimated earnings compared with the 21.4 times for China’s Shanghai Composite Index.

“India is under-priced compared to China, said Venkatraman Anantha-Nageswaran, the global chief investment officer in Singapore at Bank Julius Baer and Co., which oversees the equivalent of $281 billion worldwide. “The relative performance gap in economies and assets markets between India and China will not only narrow considerably, but also move in favour of India."