A dovish rate hike outlook from the US central bank spurred Indian stocks to a new high on Thursday as investors bet that the gush of easy liquidity fuelling emerging market assets will continue.

The National Stock Exchange of India’s 50-stock Nifty index rose to a new record before closing at 9,153.7 points, up 0.76% from Wednesday’s close. This was the first time the index closed above 9,100.

BSE’s 30-share Sensex is only 438.89 points away from testing its all-time high. It ended up 0.64% at 29,585.85.

The US Federal Reserve’s “statement made it clear that path for rate hikes is on expected lines for 2017", said Rakesh Tarway, head of research at Reliance Securities Ltd. “Clarity on path will remove overhang on equity markets emanating from foreign liquidity flows."

Foreign institutional investors (FIIs) have invested $3.7 billion so far this year in Indian stocks, the highest in the Asia-Pacific region, barring South Korea.

On Wednesday night, the Fed hiked rates by 25 basis points as expected. (A basis point is one-hundredth of a percentage point.) But more importantly, Fed chair Janet Yellen said that future rate hikes would be “gradual" while reiterating her faith in the US economy. The Fed’s outlook is for lifting rates twice more this year and thrice in 2018.

The statement was dovish enough for the dollar index, which measures the US dollar’s strength against a basket of 14 currencies, to fall 0.33% on Wednesday night. On Thursday, the rupee closed at 65.41 against the dollar, up 0.43%. It has gained 3.8% this year and is the third-best-performing currency in Asia.

The hike in US interest rates indicates a strengthening of the world’s largest economy. A pick-up in the US, which is also a large importer, is positive for the global economy, said Vaibhav Agrawal, head of research at Angel Broking Ltd.

In any case, a look at past data shows that historically Indian markets have mostly recovered quickly from a Fed rate hike. In the past 20 years, on three out of every four occasions the Fed lifted rates, the Sensex’s three-month returns have been positive.

“Despite some moderation India continues to be the fastest growing large economy and that should lend support to Indian markets. So, we expect the move of domestic equity markets to be decided by local factors rather than global factors," added Agrawal.

The landslide win for the Bharatiya Janata Party in the Uttar Pradesh assembly polls has been viewed by investors as a reiteration of faith in Prime Minister Narendra Modi’s policies.

According to analysts, a second factor that could support that rally in the near term is an increase in domestic liquidity as retail investors continue to buy mutual funds and money tied up in applying for the initial public offer of Avenue Supermart Ltd (the owner of D-Mart) is freed up.

The issue got a record subscription of 105 times, which means it has locked up around Rs1.94 trillion till it debuts on Dalal Street.

“After the Avenue Supermart listing, there could be more liquidity in the market propelling it to rally further," said Ajay Bodke, chief executive and chief portfolio manager, portfolio management services, at securities house Prabhudas Lilladher Pvt. Ltd.

To be sure though, a section of analysts is warning that valuations are still a concern. “There is a risk of a bubble being formed, as prices are moving far ahead of fundamentals," market analyst Ambareesh Baliga said.

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