Here are the reasons for the rally.
1) Global rally: The latest trigger is the turnaround in global sentiments. Asian shares jumped, the euro surged more than 1 per cent, and Dow futures traded with strong gains Friday after European leaders agreed that euro zone banks could be recapitalised without adding to government debt, soothing fears over growing credit strains in Italy and Spain.
2) Domestic sentiments turn: Markets believe Prime Minister Manmohan Singh will push reforms and bring the country's growth back on tracks. Two days in to the finance ministry, the PM has not disappointed. His statements reflect what markets have been waiting to hear for months.
3) Clarification on GAAR: The general anti-avoidance rule of Gaar, introduces in the Budget, was the single biggest dampener for markets. Economists and investors said these tax proposals were vague and confusingly worded, creating uncertainty at a time when the country needed capital inflows to help plug a widening current account deficit. The new draft guidelines on GAAR announced late night yesterday have led to some clarity.
4) Attractive valuation: India is now trading at a price to book multiple of 2.1-times, which is close to the trough valuations of 2-times in the 2002 and 2008 cycles.
5) Brokerage upgrades: Global brokerage firms on whose advice several funds invest billions of dollars have started turning positive in Indian stocks. Morgan Stanley upgraded Indian stocks to "equalweight" after being "underweight" since the first quarter of 2011 today. Morgan Stanley upgrade comes after Deutsche Bank and J.P.Morgan upgraded Indian stocks to "overweight" from "neutral".
6) FDI inflows: Big multinationals like Coca-Cola and IKEA decided to invest in the country at a time when sentiments were at an all-time low. Coca-Cola Co on June 26 announced a $3 billion in investment in India over the next eight years. Swedish retailer IKEA, the world's largest furniture maker, said on June 24 that it would invest 1.5 billion euros to open 25 stores in Asia's third-largest economy.
7) Most of the negatives are priced in the stock prices. The India market is already pricing in the adverse global environment and the current domestic situation of high inflation and slower trend GDP growth.
8) Crude oil prices have crashed: Lower oil prices help India's current account deficit, which is the gap between exports and imports. India spends a huge amount of its precious foreign reserves on oil imports. Every $10 drop in oil improves India's current account by 0.4 percentage points of GDP, Goldman Sachs said.
9) Gold imports are down: This is also likely to bring down India's current account deficit.
10) Technical support: The 5,150-5,200 mark was a big resistance for the Nifty. If the Nifty index, which is widely tracked by analysts, manages to close above these levels, markets are unlikely to go down in a hurry.
(With inputs from Reuters)