Benchmark indices, the Sensex and the Nifty50, ended at record closing highs on Friday, surpassing the previous closing high that was touched on Monday. A sharp slide in global crude oil prices boosted domestic equities and the rupee on Friday.
Investor sentiment has been buoyant, following the Narendra Modi-led Bharatiya Janata Party's landslide victory in the general election, said experts.
The benchmark Sensex ended 623 points, or 1.61 per cent, higher to end at 39,435, while the Nifty50 jumped 187 points, or 1.6 per cent, higher to close at 11,844. Both the indices logged their best weekly performance in nearly seven weeks - gaining over 4 per cent on the back of election euphoria.
It was the best day-after-election-results performance for the markets since 1998. The rupee jumped 0.7 per cent against the US dollar to end at 69.53 over its previous day's close of 70.
Market players attributed the appreciation in the rupee to sharp foreign inflows. Foreign portfolio investors (FPIs) bought shares worth Rs 2,026 crore on Friday, extending their weekly buying tally to Rs 5,891 crore.
Brent crude oil prices fell 4.5 per cent on Thursday and where down over 6 per cent for the week. Prices, however, edged slightly higher on Friday amid gains in global equities.
Experts said decline in oil prices would improve India's macro economic picture, provide there was more leeway for the government to push through reform measures and help corporates.
"Stability in the macro environment will give legroom to the corporate houses to plan medium-to-long term growth and instill confidence in foreign investors," said Vishal Kampani, managing director, JM Financial Group.
Market experts said certain FPIs were increasing their India allocation following the election outcome.
"With the ruling BJP set for another five-year term, political risks have reduced and market expectations of the government's continuity have been addressed," said Ravi Muthukrishnan, head of institutional research at Elara Capital. "However, the current level of corporate fundamentals, geopolitical developments, such as trade wars and US-Iran conflict, and the progress of monsoon will weigh on the markets," he added.
Experts point out that the markets are currently trading at valuations higher than their historical averages. The Nifty is currently trading at more than 18 times its estimated one-year forward earnings, compared to the 10-year average of 16 times. For meaningful uptick in the markets, corporate earnings growth has to see significant improvement, which is only possible over the next two or three quarters, experts said.
Some, however, said in the near term, the markets could overshoot valuations due to the favourable election verdict.
"We believe election-related exuberance could propel markets in the near term and pose an upside risk to our Nifty target of 12,000," said Muthukrishnan.
On Thursday, the Sensex and Nifty climbed to record highs of 40,125 and 12,041, respectively. The markets had failed to hold on to the gains as investors started to worry about high valuations, poor earnings growth and sluggish economy.
On Friday, however, the trading momentum was strong as the markets ended near their day's high. Also, the broader markets outperformed, with the mid- and small-cap indices gaining more than 2 per cent each.
Except four, all constituents of the Sensex rose. ICICI Bank rose 5.1 per cent - the most among Sensex components. Larsen & Toubro, Bharti Airtel, Tata Motors and Vedanta rose more than 4 per cent each. All the sectoral indices of the Sensex gained, with realty and capital goods rising the most.