Indian stocks are luring the biggest inflows ever for January as foreign investors grow confident the government will rein in the budget deficit and boost the economy.

Overseas funds bought a net $3.01 billion of local shares this year through Jan. 23, data from the market regulator show, surpassing the earlier January record of $2.18 billion set last year. Inflows surged to $24.5 billion in 2012, the highest among 10 Asian markets tracked by Bloomberg, helping the benchmark BSE India Sensitive Index, or Sensex, to post its biggest annual jump in three years.

Stocks gained even as economic growth waned, inflation accelerated to the fastest pace among the so-called BRIC nations and the current-account deficit widened to a record. The government has taken steps to attract more inflows since September by relaxing rules on foreign investment, lowering taxes on overseas borrowing, cutting fuel subsidies and raising import taxes on gold. Finance Minister Palaniappan Chidambaram pledged on Jan. 22 to deepen the overhaul of economic policy by introducing a goods-and-services tax.

“As long as the government continues its reforms program, foreign money will keep coming,” Gary Dugan, chief investment officer for Asia and Middle East at Coutts & Co., Royal Bank of Scotland Group Plc’s wealth management unit, said in an interview in Mumbai on Jan. 22. “If you are a portfolio manager investing in emerging markets and you get more and more money every week, you can’t take a big bet against India.”

Emerging Funds

Emerging-market equity funds recorded their biggest-ever weekly inflows of $7.4 billion in the week through Jan. 9 and assets under management climbed to a record $781 billion, Jonathan Garner, chief Asia and emerging market strategist at Morgan Stanley in Hong Kong, wrote in a Jan. 11 e-mail, citing data compiled by research firm EPFR Global. As much as $5.7 billion flowed into developing-nation stock funds in the week ended Jan. 23, EPFR data show.

While rising inflows tend to foreshadow short-term market declines, Garner said global monetary stimulus, accelerating economic growth and an improving outlook for earnings will support share prices.

The Federal Reserve has kept its benchmark interest rate near zero since 2008 and is buying about $85 billion a month of debt securities, while the Bank of Japan said on Jan. 22 it will start an open-ended bond purchase program next year.

China Stocks

Only two out of 13, or 15 percent, of Sensex-listed companies that have reported December-quarter earnings have missed forecasts, compared with 40 percent in the previous two quarters, data compiled by Bloomberg show. Net incomes of the 30 Sensex companies may rise 11 percent in the quarter from a year ago, Kotak Institutional Equities said in a Jan. 3 report.

The flow of money into Indian stocks may slow as signs of an economic recovery and cheaper valuations lure more overseas funds to Chinese equities, Anand Tandon, chief executive officer of JRG Securities Ltd., told Bloomberg TV India on Jan. 24. The Hang Seng China Enterprises Index, a gauge of Chinese stocks traded in Hong Kong, has risen 33 percent from an 11-month low on Sept. 5.

“Last year we were one of the best-performing markets as we got a disproportionate amount of emerging-market funds, and this year the expectation is that perhaps China will hold pole position there,” Tandon said.

The Sensex is trading at 15.9 times estimated 12-month earnings, the highest level since February and the most expensive among the BRIC nations that include Brazil, Russia and China. The Hang Seng China index is valued at 9 times.

‘No Longer Cheap’

“We are positive on the markets but realize that valuations are no longer cheap,” K. Ramanathan, chief investment officer at ING Investment Management, told Bloomberg TV India on Jan. 23. “The market’s movement will be in line with earnings growth.”

The policies announced by Prime Minister Manmohan Singh’s administration will help bolster an economy that the Finance Ministry estimates may grow as little as 5.7 percent in the year ending March 31, the slowest pace in a decade.

The government approved plans to allow overseas retailers such as Wal-Mart Stores Inc. to own 51 percent of supermarket chains, lifted a restriction on airlines selling stakes to foreign carriers and is seeking to allow overseas companies to invest in the pensions industry for the first time. The government also this month raised taxes on gold imports and curbed fuel subsidies.

India will seek to raise at least 300 billion rupees ($5.6 billion) from the sale of shares in state-owned companies in 2013-2014, Chidambaram said at a conference in Hong Kong on Jan. 22.

“The finance minister has taken the bull by the horns,” A.K. Prabhakar, senior vice president for equity research at Anand Rathi Financial Services Ltd. in Mumbai, said in a phone interview on Jan. 25. “Foreign investors are starting to believe in Chidambaram’s ability to walk the talk.”