By Abhishek Vishnoi and Rafael Nam
MUMBAI (Reuters) - The Sensex surged to a record on Friday as blue chips rallied on the back of strong foreign buying, in a remarkable turnaround from two months earlier, when the rupee hit record lows and threatened a crisis of confidence.
The Sensex has been propelled by foreign inflows of around $3.5 billion since the Federal Reserve unexpectedly delayed tapering of its monetary stimulus.
The foreign buying comes despite mixed signals in an economy growing at its slowest in a decade, with analysts seeing new challenges ahead as the central bank raises interest rates to curb stubbornly high inflation.
That has made some investors cautious about whether a rally that has sent the index up 21.5 percent since a yearly low on August 28. can be sustained.
"I am not too pleased with the way fundamentals are shaping up. This new high is driven by only a handful of stocks which are hopelessly expensive, despite fundamentals," said fund manager Phani Sekhar at Angel Broking.
"The liquidity rush is making people accumulate stocks. If fundamentals don't improve or liquidity tapers, then this rally won't have many legs."
The Sensex rose as high as 21,293.88 points, a gain of 0.6 percent for the day, surpassing the previous record of 21,206.77 points on January 10, 2008. It ended Friday up 0.2 percent.
Despite the record high, the Sensex remains Asia's fourth-worst performer this year in dollar terms among the exchanges tracked by Thomson Reuters, with a fall of 2.6 percent.
The returns have been hurt by a weak rupee, which hit a record low of 68.85 in late August, that had sparked concerns about a currency crisis in the country.
Those concerns have subsided, thanks to the delay in the Fed tapering and steps to steady the rupee taken by India's new central bank governor Raghuram Rajan.
Still, challenges to the broader economy remain. Manufacturing activity contracted for a third straight month in October, data on Friday showed, for example.
Signs of weakness are keeping the economic outlook uncertain even as other data show signs of improvement, including a report showing India's infrastructure sector output rising at its fastest in a year.
The World Bank last month slashed its growth forecast for Asia's third-largest economy to 4.7 percent in the year ending March, below the decade low of 5 percent in the previous fiscal.
The Reserve Bank of India also raised interest rates by a quarter percentage point for a second consecutive month in October, to fight accelerating inflation.
Indian shares are expensive compared to regional peers, trading at about 14.4 times trailing 12-month earnings compared to 10.6 times for Asian emerging markets, Credit Suisse said.
Yet blue chips have been gaining. The Nifty rose 0.1 percent, also within sight of a record high set on January 8, 2008.
Hero MotoCorp Ltd (NSI:HEROMOTOCO) gained 1.1 percent after the company said October sales rose 18.2 percent.
(Editing by Clarence Fernandez)