Mumbai: India’s benchmark indices, BSE Sensex and Nifty, scaled new record highs on Wednesday after India’s ranking rose 30 notches to 100 in the World Bank’s ease of doing business survey for 2018. Regulatory and policy reforms put in place by the government were credited for the improvement.

The market rally, spurred by a global equities surge and a planned Rs2.11 trillion PSU bank recapitalisation programme that has boosted banking stocks, has resulted in the gradual return of foreign institutional investors (FIIs), undeterred by corporate earnings downgrades.

On Wednesday, the BSE Sensex closed at 33,600.27 points, up 387.14 points or 1.17%. The National Stock Exchange’s Nifty 50 closed at 10,440.50 points, up 105.20 points or 1%.

“The markets are rallying on hopes of an improving economy and more positive surprises in September quarter earnings," said Mahesh Patil, who helps manage Rs2.25 trillion in assets as co-chief investment officer at Aditya Birla Sun Life Asset Management Company. “There is less downside risk now in the markets as disruptions caused by goods and service tax (GST), demonetisation and NPA (non-performing asset) issues are behind us. Long-term benefits of government reforms will start playing out."

The promise of a recovery in economic growth is also attracting FIIs. They bought Indian stocks worth $295.7 million in October after withdrawing nearly $2.4 billion over the previous two months.

What’s adding to their confidence is a slew of stock market target upgrades by foreign investment banks. Goldman Sachs Group Inc. and Citigroup Inc. have raised their Nifty and Sensex targets, respectively, citing the bank recapitalisation programme, infrastructure push and a continued inflow of domestic savings into equities. They believe these factors more than offset concerns on surging valuations and poor earnings growth.

“Besides the positive sentiment driven by macro indicators and ease of doing business, global markets have also been supportive. Rise of commodities and steel prices indicate that commercial demand has increased, which are big positive factors contributing to the global economy," said Sanjeev Zarbade, vice president at Kotak Securities Ltd.

Still, some suggest caution given that a recovery in corporate earnings growth is still elusive; Bloomberg data shows that Nifty firms’ consensus earnings per share (EPS) forecast for the current financial year has been cut by 9.1% since April to Rs493.2 and by 3.9% to Rs617.1 for the next year. That suggests that Indian stocks are trading at expensive levels.

Second, as fiscal deficit at the end of the first half of the fiscal touched 91.3% of the budget estimate, a few analysts feel India is at the risk of a fiscal slippage which may impact growth, inflation and interest rates.

“While India’s weaker fiscal position and higher public debt levels than its peers do not pose any immediate threat to debt sustainability, we believe they are inflationary and both reduce the scope for countercyclical policy to support growth," said Tanvee Gupta Jain, economist at UBS Securities India Pvt. Ltd, in a note on 11 October.

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