Indian equity benchmarks continued their rally on Thursday, with the National Stock Exchange's Nifty crossing the 5,500-mark during trading hours, after two-and-a-half years.

The index closed the day at 5,540, a shade below its intra-day peak.

The 30-share Bombay Stock Exchange Sensex traded at a 30-month high, as flows from overseas investors provided strong support.

Foreign institutional investors have been net investors to the tune of  Rs 55,000 crore (Rs 550 billion) in equity markets this year so far. In contrast, domestic institutional investors have been net sellers over the past three months.

But will the party last? According to experts, the FII-backed rally may lose steam in coming sessions.

According to Nomura Financial Advisory and Securities, the recent system-wide squeeze on liquidity and emerging signs of an easing in economic activity -- evident from the index of industrial production, imports, railway freight and import traffic at ports -- 'lead us to think that we might be heading into a period of market consolidation, especially after the recent market rally from the 'local' bottom on May 25.'

Anita Gandhi, whole-time director, Arihant Capital Markets, says the market is driven by liquidity from FIIs, even as domestic funds have been sellers.

"How long the inflows continue needs to be seen.

As FIIs have deployed most of their funds, the rally may slow down in coming days. One needs to be stock-specific at current levels. Sectorally, some movement may be seen in oil and gas, and technology stocks," she said.

At the moment, there aren't many triggers in place, say analysts.

The earnings season received only a mixed response.

Analysts at Morgan Stanley say the 'earnings growth upgrades have definitely slowed down in recent weeks, although our estimates remain a tad ahead of the consensus'.

The lowering of growth rates and inflation targeting by the central bank is expected to see the strong pace of growth take a breather.

"We expect the growth pace to ease a bit and moderation is most likely," says Rahul Bajora, regional economist with Barclays Capital, who oversees Southeast Asian markets.

Indian equity markets received almost half of the fund inflows that Asian emerging markets received. In July, the flows were at $3.5 billion, compared with the $2.4-billion inflow in South Korea and $2.12-billion in Taiwan.

Analysts say the monsoon has been positive and this will provide the market some support, but will not trigger a climb. According to Kotak Institutional Equities, "We do not see any major triggers for the Indian market in the short term (next three months), unless the government provides impetus to reforms.

Earnings upgrades look doubtful and growth stocks are expensive." J P Morgan says that it does not expect to see the FII inflow dry up completely, but the pace would slow down. And domestic institutional investors that have been providing support to the markets will be looking at a defensive strategy, say analysts.