Diwali dhamaka isn’t over! How a Rs 38 lakh crore bull run sent Sensex up 8,000 points and Nifty up 10% in 8 days

India’s Diwali rally is gathering momentum, with the combined market capitalisation of all companies listed on the BSE rising by nearly Rs 38 lakh crore in just eight trading sessions this month. The market value of BSE-listed companies climbed to around Rs 512 lakh crore, while the Sensex surged nearly 8,000 points. The Nifty also rallied about 10% during the period to cross 25,400-level while Sensex soared above 82,500.

The rally, which began ahead of Diwali, has continued after the festival, powered by aggressive FII buying, stronger-than-expected Q2 earnings and improving global sentiment toward Indian equities led by cooling off in AI trade.

“This surge was triggered mainly by the aggressive FII buying of Rs 53,170 crores, so far, this month,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Investments.


The latest market surge marks a sharp reversal in foreign investor sentiment after sustained selling pressure earlier in the year. Vijayakumar said the change in the market environment was also triggered by “positive global clues for India from the weakening of the AI trade.”

However, he said the rally’s fundamental support came from corporate earnings.

“The real fundamental support to the rally has come from the better-than-expected Q2 results,” Vijayakumar said. Earnings growth in the Nifty 50 reached nearly 24% in the second quarter, a 12-quarter high, helping compress the index’s forward price-to-earnings valuation to fair levels, he added.

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FIIs return, tax hopes grow

The prospect of tax reforms for long-term investors is also prompting foreign investors to reassess their India exposure, according to Manoj Purohit, Partner and Leader, Financial Services Tax, Tax & Regulatory Services at BDO India.

“Until recently, FPIs have been constantly exiting the Indian capital market. However, the recent few weeks have witnessed a wait-and-watch approach towards large stake sales in Indian listed companies, as expectations of capital market tax reforms gather momentum,” Purohit said.

He said recent representations by industry bodies, along with the Finance Ministry’s readiness to revisit the taxation framework for long-term investors in the upcoming Budget 2027, had encouraged foreign investors to pause and reassess Indian equities from a long-term perspective.

Investors holding long-term positions with significant unrealised gains are reportedly postponing exits while awaiting clarity on whether the government will rationalise equity taxation and reduce transaction costs, Purohit said.

Industry proposals include rationalising the Securities Transaction Tax, simplifying capital-gains taxation and providing potential relief under the Long Term Capital Gains regime for offshore institutional investors.

Expectations have also gathered pace around the possible abolition of the current 12.5% LTCG tax on foreign investors’ equity investments. Industry bodies have advocated restoring the LTCG exemption on listed securities and rationalising LTCG, Short-Term Capital Gains and STT provisions.

“If the aforesaid proposal materialise, they could boost investor confidence, attract foreign capital, and reinforce India’s position as a leading emerging market investment destination,” Purohit said.

He added that tax reform may not be the only factor driving the revival in market sentiment. Ease of doing business, post-tax corporate earnings, US trade policies, currency valuations and inflation will also influence India’s appeal to global investors.

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Global backdrop turns supportive

The broader global environment has also become more favourable for emerging markets. Political developments in the US have raised hopes of an easing of aggressive trade measures, while expectations of lower global interest rates, stronger exchange rates and improved liquidity have supported sentiment.

The decline in Brent crude to around $92 a barrel is another macroeconomic relief for India, Vijayakumar said.

At the same time, risks remain. Rising US inflation and higher US bond yields, with the 10-year yield returning to 5%, could limit the pace of the rally. Profit booking by domestic institutional investors may also restrain gains.

“Given the new favourable environment for the Indian market, FIIs are likely to continue buying,” Vijayakumar said. He expects frontline stocks in banking and financials, telecom, capital goods, select auto and pharmaceutical companies to remain resilient.

“This rally, which has more steam left, will be led again by large-caps,” he said.

Earnings, not just liquidity

Vikas Khemani of Carnelian Asset Management said the market was entering a phase where credit, consumption and investment were moving together in a combination that could support a multi-year earnings cycle.

“India will lead the world in growth which coupled with unleveraged balance sheet, private sector capex and consumption picking up will be structural drivers over next few years,” Khemani said.

He expects earnings growth to drive returns from here, describing that as “the healthier kind of return.”

Steady domestic savings flowing into equities are providing the market with a strong base, Khemani said. Foreign investors returning as global conditions stabilise would be an additional tailwind, rather than a requirement.

“There will be volatile stretches along the way,” he said. “But over the next two to three years, we believe improving fundamentals and reasonable valuations make today a good starting point for patient investors.”

HSBC has also turned more constructive on Indian equities. Following a multi-year valuation reset and significant underperformance relative to emerging markets, the global bank has raised Indian equities to overweight.

HSBC cited strong credit growth, resilient earnings and measures supporting growth and the currency. It said India also offered diversification and lower volatility in Asian markets dominated by AI stocks.

The rally has therefore brought together several forces: a sharp reversal in FII flows, better earnings, hopes of tax reform, easing global trade concerns, lower crude prices and a rotation away from the AI-heavy parts of global markets.

For now, the Diwali fireworks are continuing. But with US yields at 5% and domestic investors booking profits, the next phase of the rally may depend on whether earnings and foreign flows can continue to offset global macro risks.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)