The fate of India’s world-beating stock-market rally hinges on a routine event: earnings season.

Equities are trading near record levels in Mumbai, bolstered by bets that a state election victory will embolden Prime Minister Narendra Modi to push ahead with his reform agenda. Valuations rose to the highest level since 2010 at the end of March and the S&P BSE Sensex index is the top-performing gauge this year among the world’s 10 biggest stock markets.

The gap between share prices and company profits has widened since 2014 on expectations economic growth will filter into bottom lines. That hasn’t happened consistently -- while India’s GDP expanded 7 percent or more in each of the last four quarters, Sensex profits fell in two of those periods amid a tepid investment climate and rising bad loans.

“The return expectations have to moderate,” said Mahesh Patil, who helps manage about $30 billion in assets as co-chief investment of Birla Sunlife Asset Management Co. “If expectations are more realistic, the market should be able to deliver that in the medium term.”

Earnings season kicks off Thursday, when software developer Infosys Ltd. is scheduled to report. Company results will show performance during the first full quarter since Modi ordered a recall of high-value currency notes in November in a bid to reduce graft.

Sensex members will post a 9.1 percent increase in net incomes for the three months ended March, helped by higher commodity prices, Deutsche Bank said last week. That would be the biggest quarterly climb in a year, data compiled by Bloomberg show.

David Fuller's view

India remains a great story for long-term investors.  In terms of governance, India probably has the most effective leader of any country.  President Narendra Modi is brilliant, economically savvy, a strong leader, and a charismatic speaker from a humble background.

India also has by far the largest young population in the world. 

India is taking advantage of the latest technologies to solve its inefficiency problems.  It has an increasing number of highly successful companies such as HFDC Bank, Housing Development Finance, IndusInd Bank, Maruti Suzuki India and Ultratech Cement, you can also see from these charts and the Nifty 50 Index that India is temporarily overextended.  The best time to buy India, I maintain, is following one of its periodic shakeouts.  The best investment vehicles for many of us with an interest in India are the investment trusts (closed end funds), such as the JPMorgan Indian Investment Trust (JII LN) or the equivalent in other countries.  I would not buy India today, but I would following a 20% plus selloff.  While Narendra Modi remains Prime Minister with a comfortable majority, I think India will remain a top investment, albeit volatile.