Market analysts note that the current rally, which has seen the Sensex topping 8,000 for the first time in history, has largely been driven by foreign fund inflows.
After pumping in a record $8.50 billion in 2004, foreign institutional investors have already put in $7.8 billion dollars in 2005. FIIs had reported net inflows of $6.59 billion in 2003 and $751 million in 2002.
The inflows in September alone amount to $267 million (Rs 1,166 crore). For the month of August, FIIs invested Rs 5,051.20 crore.
Among Asian emerging markets, India has seen the most sustained buying from FIIs in 2005, apart from Taiwan. Compared with their investments of $7.8 billion in India in 2005, FIIs have put in $12.80 billion in Taiwan (end of August).
Other markets such as Thailand ($2.60 billion), Korea ($1.8 billion), and Philippines ($0.23 billion) lag far behind. FIIs have been net sellers in Indonesia ($-2.91 billion) during the period.
While there is no doubting the impact of FII inflows in shaping the near term destiny of Indian markets, some analysts have expressed doubts about rising valuations.
According to a recent report by global investment research firm, UBS, India is now within 4 per cent of becoming the most overvalued market in Asia, after Australia.
The report notes that the only time India was more overvalued than the current period was in Feb 2000 during the Technology bubble. Domestic fund managers have also noted that there could be short-term dampeners to market sentiments.
"While we continue to be positive about the long-term prospects of the domestic markets, the dampeners could be high oil prices, the impact of new government spending programmes on public finances and rising US rates on global liquidity," says KN Sivasubramanian, senior portfolio manager - equity at Franklin Templeton Mutual Fund.
However, even at the current levels, most fund managers are optimistic about long term prospects of Indian markets. According to some analysts, given the current pace, FII inflows during 2005 could well top $10 billion.