Indian shares are on a roll, riding the crest of optimism about improving prospects for an economy that has had a torrid time for over a year. The upbeat mood is best reflected among foreign portfolio investors who have ploughed in a record $3.5 billion so far in January, with more than 90 per cent of the amount going into equities.

Earnings of companies in the December quarter broadly indicate a pick-up in both sales and profits, for both export-focused firms such as software services and domestic-demand driven firms. Although trouble spots like pressure on margins remain, there is a clear sign of a turnaround in the making.

Maruti Suzuki, the country’s largest car maker, reported on Friday its quarterly profit more than doubled to Rs5 billion while sales climbed

46 per cent to Rs109.6 billion. The results drove its shares more than four per cent to their highest in three years.

There will be more good news for automobile makers next week when the central bank announces a widely expected cut in interest rates, which would be the first reduction since last April. A host of other sectors such as banks, property developers, engineering and construction and consumer goods companies would also get a leg up.

The Reserve Bank of India’s monetary policy meeting on Tuesday is the biggest event next week for investors, and Governor D. Subbarao’s comments that could provide clues on the outlook for rates will also have a bearing on the markets.

The governor has been a hawk, refusing to buckle to pressure from the industry and the government. He has mellowed his stance though inflation continues to be his biggest bogey. Recent moves by New Delhi to fix fiscal imbalances by raising fuel prices and reducing subsidies would put upward pressure on inflation, and it remains to be seen how the RBI sees these changes.

“The markets have factored in a 25 basis points cut in interest rates,” equity salesman Mahesh Dalal said. “It would still provide a tremendous morale booster when it is announced. Lower borrowing costs will deliver a strong momentum to growth.”

Shares in Larsen & Toubro rose 1.6 per cent on Thursday after the leading construction and engineering company said new orders jumped 14 per cent to Rs195.45 billion, erasing concerns about a slowdown in overall activity. The company, whose operations are spread across many countries, including in the Gulf, had total orders on hand worth

Rs1.62 trillion.

“L&T’s continuing strong order inflow run rate has largely negated the recent heightened concerns on order slowdown and may halt its large underperformance over the past three months,” analyst Devang Patel at Avendus Securities wrote in a report.

The brokerage has maintained its “Add” recommendation on the stock, which jumped 61 per cent in 2012 but is little changed this month at Rs1,607.30. Patel has an end-December price target of Rs1,910.

The top-30 Sensex has rallied 3.5 per cent this month to 20,103.53, after gaining nearly 26 per cent in 2012 and is within reach of its all-time high of 21,206.77 hit in early 2008.

Foreign fund managers, who have been the key drivers behind the surge in Indian shares, believe the market is still cheap and firmer policy initiatives by the authorities could bring in droves of investors seeking higher growth.

“With the case of India, I already find that valuation is on the low side,” Tai Hui, chief Asia Pacific strategist at JPMorgan, told ET Now television channel. “So that is pretty attractive.”

India’s nearly $2 trillion economy, Asia’s third largest after China and Japan, is expected to post its slowest growth in a decade in the financial year ending in March at around 5.5 per cent, but economists see the pace of expansion accelerating to 6.5 per cent or more in 2013-14.

Smooth-talking Finance Minister P. Chidambaram has embarked on a four-city tour through Asia and Europe to woo investors and his audience has been receptive. He has promised stable tax rates, subsidy regime reform, economic legislation for freer investment and reduction in the fiscal deficit – all sound ingredients for attracting investment and preparing the ground for faster growth.

Little surprise that some of the world’s top business honchos are among the new class of investors queuing up to put money into India, indicating they believe the country offers big potential for solid returns in the coming years.

Former bank bosses such as Vikram Pandit of Citigroup and John Mack of Morgan Stanley are investing in Indian private equity fund GTI Global, which will buy stakes in Indian companies, the Economic Times reported.

The fund, launched in 2011 with $75 million, will now have $375 committed from 15 overseas investors, including Japan’s Mitsui Corp, it said.

Corporate results to watch next week include ICICI Bank, Bharti Airtel, Bharat Heavy Electricals and Reliance Capital.

— The writer is a journalist based in India.