The BSE Sensex closed at a record high on Wednesday as drug makers rallied on optimism about their quarterly earnings, although analysts still remain cautious about how far broader gains can sustain.
A recommendation from a Reserve Bank of India (RBI) panel on Tuesday to make taming high retail inflation a priority is raising the prospect of a sustained period of high interest rates, potentially limiting broader gains in shares at a time when concerns already remain about earnings.
India is also due to face uncertain general elections due by May, while the U.S. Federal Reserve's gradual scaledown of its monetary stimulus could still roil emerging markets, said fund managers.
Furthermore, global investors, who boosted Indian shares with net purchases of over $20 billion last year, are expected to favour more developed markets such as the United States this year given their improving economic outlook.
"All emerging markets would underperform as Fed tapering impacts global liquidity. While India may see some differentiation due to better current account, it will by no means outperform developed peers in 2014," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.
The Sensex rose 0.41 per cent, or 86.55 points, to 21,337.67, surpassing its previous record close of 21,326.42 hit on December 9.
Still, the index remained below its all-time high of 21,483.74 hit on that day.
The broader Nifty rose 0.4 per cent, or 25.15 points, to 6,338.95.
Gains on Wednesday were led by drugmakers amid optimism about solid October-December earnings, with smaller player Torrent Pharmaceuticals Ltd surging 8 per cent after posting a 41 per cent rise in its quarterly net profit.
That boosted bigger rivals ahead of their earnings results: Sun Pharmaceutical Industries Ltd rose 3 per cent, Lupin Ltd gained 2.1 per cent and Cipla ended higher 1.3 per cent.
Recently beaten-down stocks like Bharti Airtel rose 1.6 per cent and Reliance Industries Ltd gained 1.1 per cent, on value-buying.
Zee Entertainment Enterprises Ltd rose 0.9 per cent after the company said its December-quarter consolidated net profit rose 10 per cent to 2.14 billion rupees.
Housing Development Finance Corp Ltd rose 0.3 per cent after the company said its December-quarter net profit rose 12 per cent to 12.78 billion rupees.
However, select lenders fell on expectations that the RBI panel's recommendations would lead to a more hawkish central bank even as the economy is widely expected to be growing at below the decade low of 5 per cent hit in the fiscal year ended March 2013.
The RBI is due to hold its policy review on January 28, raising the prospect it may chose to resume rate hikes after last raising interest rates by 50 basis points over September and October.
State Bank of India fell 0.8 per cent after gaining 2.3 per cent in the previous two sessions.