After a brief pause following the June general election, overseas funds are once again pouring into the Indian stock market, signaling the strong comeback of this $5 trillion market.

With the expectation of policy continuity and robust growth prospects, especially driven by the Fed rate cuts, investor sentiment and confidence continue to recover.

This week, the Indian stock market continued to reach new highs. The SENSEX index and NIFTY index rose by 1.7% and 1.5% respectively on Friday, both hitting historical highs.

So far this year, the performance of the Indian stock market index has been among the best globally.

Year to date, the SENSEX index has soared by over 16%, and the NIFTY index has surged by over 18%, ranking third and fourth respectively among major global exchanges, following only the Nasdaq and the S&P 500.

Analysts expect the upward trend in the Indian stock market to continue until 2025.

According to Bloomberg data, foreign net purchases this quarter amounted to $8.5 billion, expected to be the highest level since mid-2023.

Following Indian Prime Minister Modi's third term win, bets on policy continuity have been reinstated, especially with the Fed rate cuts, making the prospect of capital inflows appear hopeful.

The surge in fund inflows also indicates that investors are becoming increasingly satisfied with the valuation of Indian stocks.

Compared to peers in emerging markets and its own history, the valuation of Indian stocks is relatively high, as the Indian NSE Nifty 50 index has been rising for the ninth consecutive year.

However, James Cheo, Chief Investment Officer for Global Private Banking and Wealth Management at HSBC, based in Singapore overseeing Southeast Asia and India, said:

"Despite the high valuation, the Indian stock market still remains attractive compared to other markets with weaker growth prospects. Strong corporate performance and favorable economic conditions are driving India's growth momentum."

The International Monetary Fund predicts that by 2028, India will become the world's third largest economy. Last quarter, India's Gross Domestic Product grew by 6.7% year-on-year.

From April to May this year, foreign investors continued to sell off. After the general election, foreign investment inflows rebounded in June and July, but slowed down in August.

However, it is expected to reach a six-month high in September, and is expected to attract overseas funds for the fourth consecutive month.

The Indian index is expected to rise for the sixth consecutive quarter.

The recent rally has pushed the 12-month expected PEs of Sensex and Nifty to 23.6 and 24.4 respectively, the highest among emerging markets.

Analysts suggest that expectations of a soft landing of the US economy may also support the development of industries such as information technology and pharmaceuticals, with most of these industries deriving a significant portion of their revenue from the USA.

Real estate, autos, public sector enterprises, pharmaceuticals, and energy have been the best-performing industry indices so far this year.

Nilesh Shah, Director & General Manager of Kotak Mahindra AMC, mentioned that smart money seems to be shifting towards large-cap stocks, as these stocks are expected to attract more foreign inflows, highlighting that their performance is expected to outperform mid-caps after the Fed rate cut.

Looking ahead, a potential soft landing of the US economy could further benefit industries such as IT and pharmaceuticals in India, given the close revenue relationships these industries have with the US market.

Sumeet Rohra, Fund Manager at Singapore's Smartsun Capital Pte, also pointed out that the return of overseas investors signifies that a market with returns cannot be overlooked for long, and India's weighting in the MSCI index has also significantly increased.

Editor/Emily