Mumbai: Indian stock indices closed at new lifetime highs on Wednesday as prospects of monsoon rains exceeding earlier expectations spurred investors to buy shares of companies likely to benefit from higher consumption, shrugging aside concerns over corporate earnings.

The BSE’s benchmark 30-share Sensex climbed 314.92 points, or 1.05%, to end at 30, 248.17 points and the National Stock Exchange’s broader 50-share Nifty crossed the 9,400 mark for the first time, closing 90.45 points, or 0.97%, higher at 9,407.30 points.

Shares of consumer packaged goods makers and fertilizer companies gained the most after the India Meteorological Department said rainfall in the June-to-September south-west monsoon season will likely beat earlier expectations as concerns over El Niño, the weather phenomenon associated with drought-like conditions in the subcontinent, recede.

Domestic institutional investors stepped in to counter the absence of foreign funds that have stayed away from Indian shares in recent weeks.

“The market is factoring in the positives," said Gopal Agrawal, chief investment officer at Tata Asset Management Ltd.

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Those positives are a stable political situation, moderate oil prices and prospects of better monsoon rainfall for a second consecutive year, which will lift farm incomes and boost rural consumption.

To be sure, there is a risk-on rally around the world that’s propelling emerging markets. This leg of the rally in India has been mainly driven by domestic investors as inflows continue to pour into mutual funds.

Foreign institutional investors (FIIs) have been net sellers of Indian equities since April while domestic institutional investors (DIIs) have bought Rs11,575 crore in the same period. (Provisional data show that FIIs were net buyers and DIIs net sellers on Wednesday.)

"Domestic institutional inflows into equities…are now also becoming meaningful determinants of market performance," Abhishek Saraf and Abhay Laijawala of Deutsche Bank AG wrote in an 8 May note. Their analysis shows that the MSCI India US dollar returns index declined by a median monthly 7% during bouts of FII selling in the 10 years leading up to the 2014 general elections. Since then, the median decline has fallen to 1%, “illustrating the increasing potency of domestic equity inflows and the powerful offset these flows have begun to create against FII selling", they wrote.

There has been a shift in the households savings pattern to financial assets and an increasing portion will find its way to equities, said the Deutsche Bank analysts. In fiscal 2012, 32% of household savings were in financial assets; this increased to 40% in fiscal 2015.

“There have been consistent flows into mutual funds through the retail investor base. The attraction of physical assets is waning," said Harsha Upadhyaya, chief investment officer, equity, Kotak Mahindra Asset Management Co. Ltd. “From a taxation perspective, equities are attractive. Even otherwise, given the low equity penetration, participation from retail investors would have grown anyway."

Despite domestic buyers piling onto the local consumption story, there are concerns around valuations, especially because early corporate earnings announcements for the March quarter haven’t produced any blockbuster.

“I think the most important thing is what happens to earnings from now on. In general, we haven’t had positive earnings over the past 3-5 years," said Bill Maldonado, Asia-Pacific & Global chief investment officer, equities, HSBC Global Asset Management. “For the market to make further progress, we will have to see some earnings growth, and that will be the key driver going forward."

Valuations are rich, especially in comparison with other emerging market gauges. MSCI India trades at a 40% premium to MSCI emerging markets.

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