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The Indian markets are set for another rally, this time driven by largecap stocks going into the general elections scheduled next year, said Jaykrishna Gandhi, Head, Business Development, Institutional Equities, Emkay Global Financial Services.

This comes on the back of a manic Monday with equity indices establishing new records after BJP’s victory in three Hindi heartland states -- Madhya Pradesh, Rajasthan and Chhattisgarh.

The clarity of victory in state elections and overall steady global macro environment will boost market optimism, Gandhi said.

Also, rate hikes have been largely ruled out, which opens the narrative for rate cut for some time next year.

“We believe largecaps will outperform small and midcap stocks in the near term, with laggards like banking stocks and RIL leading the way," Gandhi said.

On Monday, Nifty PSU bank and Nifty bank were among the outperforming sectors, up by 3.85 per cent and 3.61 per cent, respectively, said Vaibhav Vidwani, Research Analyst at Bonanza Portfolio.

There is optimism in the market due to new foreign inflows following the unexpected outcomes of the state elections.

The outcomes of the Assembly elections in the strategically important states of Madhya Pradesh, Rajasthan, Chhattisgarh and Telangana have positively surprised the markets, which now ascribe a higher likelihood of the continuance of current policies beyond 2024, Vidwani said.

Supporting factors also included drop in crude oil prices and the Fed's boosting bets on rate cuts.

Ahead of the RBI's monetary policy meeting scheduled later this week, investors might continue to exercise caution, Vidwani said.