Oct. 29 (Bloomberg) -- India's Sensitive Index topped 20,000 for the first time, buoyed by record inflows from U.S. and European investors that have caused the benchmark to double in less than two years.

The stock market has risen about 39 percent since it became the third emerging market after China and Russia to surpass $1 trillion in May, helped by the fastest economic growth in 60 years and a strengthening currency. Reliance Industries Ltd. led gains, elevating Chairman Mukesh Ambani to be the world's richest man, Press Trust of India reported.

``Liquidity has played an important role in this rally,'' said Chakri Lokapriya, who manages $850 million of stocks in India, Brazil, Russia and China at BNP Paribas Asset Management U.K. Ltd. in London. ``Investors have reduced exposure to western markets and as a result increased flows to emerging economies like India and China.''

Investors based outside India bought a record $17 billion of equities this year, according to the Securities and Exchange Board of India, the nation's regulator.

The Bombay Stock Exchange's Sensex index gained as much as 4.1 percent to 20,024.87 as the world's second-fastest pace of economic growth lifted profits at Larsen & Toubro Ltd. and Maruti Suzuki India Ltd. The index closed 3.8 percent, or 734.5 points higher, at 19,977.67 at 3:30 p.m. local time.

The Sensex had its biggest advance in 6 1/2 years last week after the regulator allowed more funds to buy stocks. The index took eight days to recover from a one-minute almost 10 percent slump on Oct. 17 triggered by proposed curbs on overseas buying.

Half of China

While India is trading at about half the value of China, the Sensex's 33 percent advance in two months has made it more expensive relative to other emerging markets, according to Neptune Capital Management LLC in New York. India's benchmark trades at 24.5 times future earnings compared with the Morgan Stanley Capital International's Emerging Market Index, which is valued at 16.6 times.

The Sensex is on course for its sixth annual rise led by companies owned by the billionaire Ambani brothers. Reliance Industries, operator of the world's third-largest refinery, has accounted for about a quarter of the Sensex's gain since it first crossed 10,000 points in February 2006.

Mukesh Ambani and related companies' hold 51 percent of Reliance, according to the company's website. Their stake also gives them control over the group's petroleum and resources businesses. Together, their holding is worth about $63 billion, according to data on Bloomberg.

By contrast, Microsoft Corp. Chairman Bill Gates was worth about $59 billion at the end of August, according to Forbes magazine. Mukesh Ambani has overtaken Gates and Mexico's Carlos Slim as the world's richest man, Press Trust of India said.

Biggest Gain

Larsen, the nation's biggest engineering company, was the second biggest contributor to the doubling in the Sensex by index points. The Mumbai-based company had its biggest gain in more than 15 years on Oct. 26 after reporting second-quarter profit that beat analysts' estimates.

The engineering group forecast profit and sales growth will be sustained as it benefits from the Indian government's $492 billion, five-year infrastructure spending program.

Finance Minister Palaniappan Chidambaram today said India needs to double spending on roads, ports, power and other infrastructure over the next five years to sustain growth.

The Sensex is the world's third best-performing benchmark since the U.S. Federal Reserve cut rates on Sept. 18. Hong Kong's Hang Seng Index and a measure tracking Chinese government stocks listed in the city have outperformed as investors pour funds into the world's two fastest growing major economies.

Most Expensive

While the rally means Indian stocks are now trading at their most expensive, analysts at Merrill Lynch & Co. say they expect more money to be allocated to Asia where investors can find growing economies.

Indian stocks were raised to ``market weight'' from ``underweight'' by Merrill Lynch on Oct. 16, which said the nation's economic growth, the fastest after China, will help compensate for higher valuations.

``The two economies complement each other, and given Asian markets are being propelled by top-down factors and not valuations, it is incongruous to remain underweight India while liking China,'' Mark Matthews, Hong Kong-based strategist at New York-based Merrill said.

Telecoms Lead

Phone service providers Bharti Airtel Ltd. and Anil Ambani's Reliance Communications Ltd. also drove gains in the index as they added a record number of subscribers in the world's fasting growing major wireless market.

Bharti, India's largest phone service provider, almost tripled since February 2006, while Reliance Communications, the second-biggest, more than doubled since it listed on the bourses in March last year.

Still, Indian companies have a way to go to catch valuations in China, where stocks trade at 53 times earnings.

China Life Insurance Co. today surpassed AT&T Inc. in market value, giving China five of the world's 10 largest companies, compared with three for the U.S.

China's stock rally has almost tripled its benchmark index this year, prompting securities regulators to say on Oct. 16 that the market holds ``great risks.''

Outside China, the Sensex's advance to records has made stocks more expensive compared with other emerging markets, said fund manager Gulbir Madan.

Net Sellers

Local funds are not rushing in to buy the nation's stocks. Domestic mutual funds were net sellers since Sept. 18, selling $756 million in shares, the regulator's figures show.

``Markets are too euphoric,'' said Madan, who manages about $400 million in Indian equities at Neptune Capital Management LLC in New York. ``The market is now working on the greater fool theory; people who missed the rally are getting in trying to play catch up, not realizing that if the market tumbles, it will be the most painful exit they can have.''

The Bombay and National Stock Exchanges halted trading for an hour on Oct. 17 after the one-minute plunge in equities wiped off more than $120 billion of market value.

The Securities & Exchange Board a week later said pension funds, charitable institutions, foundations and university funds will be able to register in India and buy stocks.

Madan says the Sensex could fall between 15 percent and 20 percent as it has overextended gains and the depth of the rally has been quite narrow. He is cutting his holdings in Indian equities. One in three of the 30 stocks in the index have lagged returns on the benchmark since February last year.

Not Perturbed

Still, all investors aren't perturbed by these valuations as they say the country's growth prospects, improved debt ratings and company earnings will support these valuations.

``The Sensex trading at 19 times fiscal 2009 earnings is not cheap but it's not expensive either,'' says Lokapriya at BNP Paribas. He expects earnings to grow at 20 percent for the year ending March 31, 2009. ``Markets could rise further.''

To contact the reporter on this story: Pooja Thakur in Mumbai at pthakur@bloomberg.net

Last Updated: October 29, 2007 10:44 EDT