Indian stock markets touched record highs this week as foreign investors pour massive funds into one of the fastest-growing economies in the world. But as Anjana Pasricha reports from New Delhi, there are concerns that the sharp rise in the markets could lead to volatility.

Bombay Stock Exchange, BSE, building in Mumbai (File)

Market analysts say share prices have been driven to record highs by foreign investors, who have pumped in $18 billion this year.

The overseas buyers are attracted by an economy that has grown an average of 8.5 percent a year since 2003.

But the celebrations are tinged with caution.

India's trade minister, Kamal Nath, is optimistic about the surging markets - but says the government is watching carefully.

"Sometimes it concerns us. But again, the fundamentals being strong, we feel India is emerging as a major parking lot for investors," he said.

Economists say there are worries that the huge flow of foreign capital into the country could just as easily be pulled out, leading to a sudden drop in share prices. The flood of money could also stoke inflation.

Such concerns have prompted the Central Bank to take measures to moderate the investment flood.

It has ordered banks to set aside more cash reserves to slow down lending. It is also tightening the rules under which foreign funds and businesses make stock purchases through brokers. The bank is concerned that anonymous investors could be creating excessive speculation.

Indian stock traders celebrate as Sensex benchmark index reaches 15000 points in Mumbai (File)

"Investors are coming today into the market with huge expectations. To sustain this momentum at this level could be difficult…. It has to slow down. Today, expectation is very exaggerated. Investors have to moderate their expectations," he said.

Still, recent estimates are that India's strong economic growth will remain on track, and this is triggering confidence that the good times will continue.

Central Bank Governor Y.V. Reddy recently said he expects the economy to continue its surge.

"While there could be unexpected global shocks … the growth path is likely to be not much different than what it was a few months back," he noted. "We have at the end of it retained the growth projection at 8.5 percent."

Analyst Kumar says he expects that Indian market to be an attractive one for long-term investors, because domestic companies are continuing to post healthy profits.

"Five, seven years, I think [the] market will be surely in a much stronger position," he said. "That is primarily driven by a lot of strong Indian companies. … They are proving their mettle … and that is why one can be very hopeful of the Indian stock market."

That appears to be the dominant sentiment. Analysts here are not expecting the funds pouring into the market to slow down - from overseas or domestic buyers.

They point out that foreign investors are not just attracted by the rising share prices. The 12 percent appreciation in the Indian rupee's value against the dollar this year has added to the foreigners' large profits.