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Mumbai: India’s benchmark equity indices surged to new lifetime highs on Friday, propelling the rupee to its strongest level in three months, as investors stepped up stock purchases on anticipation that a bull rally may be round the corner.

Growing optimism that the April-May general election will lead to a stable, market-friendly government, most probably led by the Bharatiya Janata Party (BJP), and improving economic data have fuelled expectations of a bull run, but analysts cautioned of more volatility ahead.

The 30-share S&P BSE Sensex gained as much as 2.08%, or 447.02 points, to 21,960.89 points in intra-day trading. The National Stock Exchange’s (NSE’s) broader 50-share Nifty rose 2.13%, or 136.65 points, to 6,537.80 points. Both are intra-day highs for the indices.

The Sensex eventually closed 1.89%, or 405.92 points, higher at 21,919.79 points, while the Nifty gained 1.96%, or 125.50 points, to 6,526.65 points. Gains for four straight sessions have added 2.8 trillion to the market capitalization of all listed firms on BSE.

The rupee gained 0.1%, taking its weekly gain to 1.1% and touched 60.9450 per dollar, the strongest since 9 December. It has rebounded 12.7% since reaching a record low of 68.845 in August. It ended at 61.09.

Tensions in Ukraine and Russia have eased, leading to favourable currency movements, and investors are opting for riskier bets such as emerging market equities, said Vaibhav Sanghavi, director of Ambit Investment Advisors Pvt. Ltd.

He also cited opinion polls pointing to a likely win for the BJP-led National Democratic Alliance in the general election.

“All these factors taken together have led to aggressive short-covering and also value buying, which is driving the market higher," said Sanghavi.

“Some funds have started deploying their idle cash and repositioning, though insurance companies seem to be selling. However, the buying by FIIs (foreign institutional investors) and cash and futures taken together is significant enough to overshadow any selling," Sanghavi added.

FIIs pumped in a total of $1.1 billion in the 15 sessions to Thursday.

Improving economic data contributed to investor optimism. The current account deficit (CAD) narrowed to $4.2 billion in the quarter ended 31 December, against $5.2 billion for the preceding three months and $31.9 billion a year earlier, data released this week showed.

The manufacturing Purchasing Managers’ Index rose to a one-year high of 52.5 in February.

“The improving macro fundamentals justify the rally. India has the best macro situation compared with other emerging markets and seems to be the best bet," said Shankar Sharma, vice-chairman and joint managing director of First Global Securities Pvt. Ltd.

“The CAD is under control. There is very little sovereign and internal debt. We may not be growing at 8% or 9% like before, but growth of 4.5-5% without leveraging the economy is wonderful," Sharma said.

Asia’s third largest economy is expected to grow 4.9% in the year ending 31 March against 4.5% a year earlier—the slowest pace in a decade.

According to P-E (price-earnings multiple) data compiled by Bloomberg, the Sensex trades at a P-E of 16.3 times against 15.8 at the end of 2013. The current P-E of the Sensex is higher than that of all of its so-called BRIC peers. Brazil’s Bovespa, Russia’s Micex and China’s Shanghai Composite index trade at a P-E of 13.9, 4.6 and 8.01, respectively.

Over fiscal years 2014 and 2015, it expects the Sensex earnings per share to post a compounded annual growth rate of 15.9%, which implies a Sensex target of 24,800 points by March 2015 or 24,000 by end-2014.

“Investors and corporates alike seem focused on the general election outcome as a key variable in their decision making," BNP Paribas analysts Manishi Raychaudhuri, Gautam Mehta and Rajan Jain wrote in a note.

“Only the equity market’s worst-case scenario of a non-Congress, non-BJP ‘Third Front’ government can, we think, upset the Indian equities apple cart," the analysts wrote in a note.

From here on, any gains are expected to be limited.

“While we may not see a big correction from here, the market is not going to run away soon. Laggards have been catching up, and this is forming a top for the market," Sharma of First Global said.

Also, NSE’s India VIX, which reflects market volatility, added 15.5% to the 16.7200 level, hinting that the markets are in for oscillation in the days to come.

Stocks that had been languishing for a while started catching up with the rally in the broader market. BSE’s Bankex and realty indices gained 5.4% each, while the capital goods index rose 4.1%.

Top private sector lender ICICI Bank Ltd and rival HDFC Bank Ltd added 5.97% and 5.31%, respectively, while smaller peer Axis Bank Ltd gained 5.92%. The country’s largest lender State Bank of India was up 4.6%.

Top real estate developer DLF Ltd jumped 9.87%, while rivals Unitech Ltd and Oberoi Realty Ltd climbed 1.85% and 0.76%, respectively. The country’s largest engineering and construction company Larsen and Toubro Ltd closed 4.9% higher.

The rupee’s strength dragged down the export-focused software and pharma companies. BSE’s IT and healthcare indices shed 2% each.

Meanwhile, 10-year government bonds completed their best week since January on optimism that demand for debt will pick up as CAD shrinks and geopolitical tensions ease.

The yield on the 8.83% sovereign notes due November 2023 fell five basis points, or 0.05 percentage point, this week to 8.81% in Mumbai, the most since the period ended 17 January. Bond yields and prices move in opposite directions.

Ravindra Sonavane and Bloomberg contributed to this story.

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