Global investors are frenetically bidding up Indian assets convinced that New Delhi’s business-friendly government would slowly and steadily catapult Asia’s third-largest economy to a stronger growth trajectory, boosting corporate earnings and investor returns.

Many shares such as Maruti Suzuki, which makes every second new car sold in India, and State Bank of India, the country’s largest lender, have more than doubled in value from their year-lows and stock indices have soared to all-time highs. The rally is fuelling a buying frenzy on the back of optimism about the outlook.

“India is a good story because of the happy coincidence of the economy bottoming out as well as the election of the most pro-growth, pro-investment leader in the world today,” Christopher Wood, managing director of global investment house CLSA, told the Mint newspaper.

“My point is that if you believe that the investment cycle is going to start in India, then you should own Indian equities,” the acclaimed fund manager said, forecasting the top-30 Sensex to reach 40,000 without giving a time frame.

The Sensex, which is closely tracked by money managers, climbed to a record 28,360.66 on Friday and closed at 28,334.63, stretching a run of weekly gains to five. The benchmark has gained a third so far this year, making it the top performer among major world markets, with foreign portfolio investors pumping in $15.5 billion.

“India is the most attractive equity market in the emerging market world. In fact, it is the most attractive equity market globally on a five-year view,” said Wood, who has been overweight on India for many months.

The 50-share Nifty closed at 8,477.35, up 34.5 per cent in 2014, after hitting an all-time high of 8,489.80 on Friday.

“India remains expensive in terms of value but does actually have a very good momentum signal, which is why as a market it still ranks quite highly,” Citigroup analysts Markus Rosgen, Yue Hin Pong and Mandy Ym Chan said in a report.

Based on price and earnings per share revisions, India shows the strongest momentum, followed by Qatar and Egypt, the Philippines and Thailand, they wrote.

Reform push

After moving cautiously in the first five months since taking over the reins in New Delhi, Prime Minister Narendra Modi is set to pick up pace with its reforms push. India’s parliament will begin its winter session on Monday and on the agenda are reform measures such as raising foreign ownership in insurance to 49 per cent that needs the lawmakers’ approval.

The government is also expected to drive legislative changes for reforming the Good and Services Tax, coal mining, and land acquisition though some of these could run into opposition. Although Modi has a majority in the Lok Sabha, the house of people, it is in minority in the upper house called the Rajya Sabha.

“The market, having bid up India’s asset prices considerably, is waiting keenly to see major reforms ahead, but it may have to settle with a government not in major hurry, instead pursuing a self-assured and steady path,” Singapore-based DBS Bank said in a report.

Facing lower-than-expected tax receipts the government last week raised the excise duty on fuels, without causing higher pump prices thanks to falling world oil prices, and some steps have been undertaken to curtail the subsidy bill. And, to keep government finances within budget, there is a squeeze on spending.

A cut back on expenditure could slow an economic recovery, which has been faltering. The September quarter GDP data, to be released on Friday, is expected to come in far below the 5.7 per cent notched in April-June because of sluggish manufacturing activity and lower farm output.

Finance Minister Arun Jaitley this week reiterated his wish for lower borrowing costs, and a central bank external member Arvind Virmani also said a rate cut would help give a thrust to spluttering growth. The Reserve Bank of India is scheduled to review policy on December 2 against a background of inflation dropping to multi-year lows.

“The longer it takes to cut rates, the more quickly the rates will come down later,” CLSA’s Wood said. “From a market standpoint, it is a perfect cycle. If he cuts rates, it is good news and if he doesn’t cut rates, you just know that he is going to cut later.”

The government is also set to kick off its divestment programme with a sale of stock in energy explorer Oil and Natural Gas Corp in early December.

Meanwhile, the Organisation for Economic Cooperation and Development said on Wednesday India’s economy would grow 6.6 per cent in 2015, up from 5.7 per cent it forecast in May. It projected growth to reach 6.8 per cent in 2016.

“The economy has shown signs of a turnaround and imbalances have lessened,” the Paris-based think-tank said. “Structural reforms would raise India’s economic growth. In their absence, however, growth will remain below the 8 per cent achieved during the previous decade.”

Banks shine

The feel-good sentiment sweeping the business and investor community got a boost on Thursday when private-sector Kotak Mahindra Bank announced it would acquire smaller rival ING Vysya Bank in an all-stock deal valued at $2.4 billion. The deal, the biggest in the Indian banking sector, is expected to trigger more such moves in an inevitable consolidation.

“It’s a good acquisition,” Aditya Narain and Abhishek Sahoo, analysts at Citigroup, said in a note. “It’s strategic, it’s accretive and pushes up Kotak from a niche to a more scaled player.” The acquisition would make Kotak the fourth largest private-sector bank.

Little surprise the news drove banking stocks across the board. The Nifty bank index leapt to a record high of 18,139.15 and closed at 18,056.30, up 17.3 per cent since the end of September.

Shares in Kotak and State Bank of India, which completed a 10-for-1 stock split, rose 10 per cent each this week.

As much as 24 banks, of the 40 lenders listed on stock exchanges in India, are majority owned by the government, and they control 70 per cent of the loans and advances, leaving tiny players struggling to survive. With economic growth expected to pick up in the coming months, and a rate cut in the horizon, demand for loans should rise boosting the outlook for banks.

Nimble-footed private sector banks such as ICICI Bank, HDFC Bank and Axis Bank as well as smaller ones like IndusInd Bank and Yes Bank are all poised to grab the emerging opportunity.

“Private banks are in a sweet spot – have already invested in branches, are well capitalised, competition is struggling; will increase share in a growing market,” Deutsche Bank analysts Manish Karwa and Manish Shukla said in a report.

“While opportunity exists for all banks to grow we see the private banks emerging as clear winners by gaining market share from state banks. Our top long term picks are HDFC Bank and Axis.”

The writer is a journalist based in India.