Mumbai: Indian stocks closed at all-time highs on Monday, powered by hopes of a favourable budget and global optimism over the upcoming US-China trade deal.

The BSE Sensex gained 259.97 points, or 0.62%, to 41,859.69, while the broader 50-share Nifty rose 0.59% to 12,329.55. Among global markets, China, Hong Kong and South Korea closed nearly 1% up on Monday.

Markets are buoyant due to positive expectations from the Union budget and an expected improvement in December quarter earnings, according to Vinod Nair, head of research at Geojit Financial Services.

“IT (information technology) has provided a good start to the season and foreign institutional investors (FIIs) are maintaining risk-on strategy with positive inflows in emerging market, expecting no hike in US Fed rate and improvement in EM (emerging market) economies in 2020," said Nair.

In 2020, FIIs have invested $363 million so far in Indian equities, after investing $14.23 billion in 2019. Domestic institutional investors, including mutual funds and insurance companies, have been net buyers of Indian shares worth 493.76 crore in 2020 so far. Last year, they had bought Indian shares worth 42,228.55 crore.

India’s industrial production data released on Friday showed a mild recovery from three months of contraction to expand 1.8% in November, signalling an early but weak improvement in the economy. The recovery, which comes against the backdrop of near-flat output growth seen in the same month a year ago, was driven by a 2.7% expansion in manufacturing output, data from the statistics ministry showed on Friday. Manufacturing output had been shrinking for the past three months, with a 2.1% contraction in October.

Still, the ongoing domestic economic slowdown remains a concern. Nomura has downgraded its relative stance on Indian equities to neutral from overweight.

“Looking forward, with domestic benchmark index rallying but still little signs of a meaningful recovery in growth, we believe scope for outperformance of India equities is limited. Thus, we downgrade our tactical relative stance on Indian equities to neutral," Nomura said in report on 10 January. “We would look to turn more constructive on India once domestic economy recovers much more strongly than currently expected, and/or we turn incrementally more cautious on the rest of Asia, particularly North Asia."

India’s steep valuations have worried market investors, and a revival in corporate earnings is critical. Data from Bloomberg shows Sensex companies’ consensus earnings per share forecast for the current fiscal have been pared by 13.13% since April. For fiscal 2020-21, it has been cut by 6.55%.

That clearly shows the current rally is not supported by fundamentals. The Sensex is trading at 19.71 times estimated earnings for the current fiscal, while the MSCI Emerging Markets Index is at 13.03 and the MSCI World Index at 17.04.

The Indian rupee strengthened against the dollar on Monday for the fifth day in a row, tracking gains in Asian peers amid optimism that the first phase of the trade deal between the US and China would be signed this week. The rupee closed at 70.86 a dollar, up 0.12% from Friday’s close of 70.94. The yield on the 10-year government bond was at 6.598% compared with its previous close of 6.588%.