Dec. 11 (Bloomberg) -- India's Sensitive Index closed above 20,000 for the first time, driven by record purchases by overseas investors and the world's second-fastest pace of economic growth.

Foreign investors have almost doubled acquisitions of Indian shares led by Reliance Industries Ltd. and ICICI Bank Ltd. since the U.S. Federal Reserve cut rates in September. The benchmark Sensitive Index recovered from its biggest monthly decline since February on speculation another cut today by the Fed will lure more investors to emerging market assets.

``Now that we have decisively crossed a milestone level, it is important that the (Fed) meeting outcome meets with expectations of a 25 basis point cut,'' said Sanjay Sinha, chief investment officer at SBI Funds Management, who oversees $7.6 billion in assets in Mumbai. If advance tax payments from companies ``are indicating strong growth we should see the market sustain at the current levels,'' he said.

The Bombay Stock Exchange's Sensex gained 360.21 points, or 1.81 percent, to 20,290.89 at the 3:30 p.m. local time close. The S&P/CNX Nifty Index on the National Stock Exchange rose 136.65 points, or 2.29 percent, to 6,097.25.

Global investors have bought $18.7 billion of stocks and bonds so far this year, almost double the previous record of $9.46 billion in 2005. Overseas investors bought a net $8.9 billion in stocks and bonds last year.

`Higher the Cut'

The Fed is poised to cut borrowing costs later today as it tries to revive growth in the world's largest economy. A quarter point rate cut to 4.25 percent, after 0.75 percentage point of reductions in September and October, would mark the greatest easing of borrowing costs since the last recession in 2001.

``The higher the cut the more the money that could flow into emerging markets including India,'' said Ajay Argal, who helps manage the equivalent of $965 million of stocks at Birla Sun Life Asset Management Co. in Mumbai. ``There's an expectation that the Fed cut will bring in more funds into the local market, in turn forcing rate cuts in India and this will benefit local banks.''

Reliance Industries, India's biggest company by market value, gained 56.25 rupees, or 2 percent, to 2,878.75. ICICI Bank, the nation's second-largest lender, rose 42.3 rupees, or 3.3 percent, to 1,316.05.

The two stocks have accounted for more than a third of the gain in the Sensex by index points in the past three months.

Housing Development Finance Corp. gained 74.6 rupees, or 2.6 percent, to 2,946.75 at the day's close.

Rally May Falter

Still, the record stock market rally may falter if the government slaps controls on overseas buying in an attempt to stem gains in the rupee, CLSA Ltd. said last month.

The local currency has climbed more than 12 percent against the dollar this year, the second-best performance in Asia, according to data on Bloomberg.

Proposals to curb offshore derivatives triggered a slump in markets that halted trading on Oct. 17 and ended eight straight weeks of gains by the Sensitive Index. Overseas investors resumed purchases after the regulator's final rules didn't impose additional curbs.

Sanjiv Duggal, who manages the world's largest holding of Indian equities, said this week he is considering inviting investors to take some of their money out of the fund and seek better-valued equities elsewhere. He expects Indian stocks to decline over the next 18 months to 24 months.

``Investors aren't factoring in earnings and news flows, but valuing people's dreams,'' said Duggal, 43, who oversees about $11 billion in Indian equities as investment director at HSBC Holdings Plc's Halbis Capital Management in Singapore. ``The risk-reward ratio is not favorable.''

Capital Controls

The Securities & Exchange Board of India, the market regulator, on Oct. 25 scrapped some offshore securities to persuade foreign investors to register in India. Finance Minister Palaniappan Chidambaram said on Nov. 12 there are no plans to impose further controls on capital flows.

The Indian economy will expand by almost 9 percent in the fiscal year ending March 31, Chidambaram said Nov. 5. Gross domestic product has grown an average 8.6 percent since 2004, the fastest pace since independence in 1947.

To sustain economic growth, the government plans to invest $500 billion on power plants, roads and ports by 2012. That will lure investors to shares of infrastructure companies, Alroy Lobo, chief strategist at Kotak Mahindra Asset Management Co., said.

``We are bullish on power-equipment players,'' Lobo told reporters at the Funds World India 2007 conference in Mumbai. ``Public-sector banks are significantly undervalued.''

Kotak Mahindra manages 217.2 billion rupees ($5.5 billion) in 65 funds, making it India's eighth-largest asset-management company, according to data from fund tracking firm Value Research.

To contact the reporter on this story: Archana Chaudhary in Mumbai at achaudhary2@bloomberg.net.

Last Updated: December 11, 2007 07:55 EST