Global brokerage firm Goldman Sachs expects a pre-election rally in Indian equities and forecasts the wide-based Nifty to reach 12,500 in the next 12 months, amid rising market expectations of a potentially stable government.

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Goldman Sachs had lowered India to "marketweight" in September on macroeconomic, earnings, rich valuations and political risks.

Saying that over the past month, the Nifty has rallied 8 per cent and recovered 65 per cent of its year-to-date under-performance as against the region. "We think risk/reward on India looks favourable again," the brokerage firm said.

Parliamentary elections have historically been an important domestic catalyst for the market given their bearing on policy choices and the progress of structural reforms.

"We raise it back to overweight (OW) given sharp under-performance in January/ February, better third quarter earnings and a pick-up in FII (foreign institutional investor) positioning from lows amid rising market expectations of a potentially stable government," Goldman Sachs said in a research note.

Indian equities have seen a 'catch up' pre-election rally over the past month supported by a revival in foreign buying.

The rally in Indian equities has been broad-based and led by cyclical sectors, mid- and small-caps, and value stocks.

Foreign inflows have notably picked up with FII net buying $4.5 billion in the past one month as market expectations of a potentially stable government have risen in recent weeks.

Historically, Nifty has rallied in five out of the past six general elections since 1996.

According to Goldman Sachs, earnings are expected to grow 16 per cent this year (highest in the region) and the Nifty is likely to reach 12,500 in 12 months.

The Sensex is currently hovering around 38,168.42, while the Nifty is quoted at 11,400.

Voting to elect the 17th Lok Sabha will be held over seven phases from April 11 to May 19 and the counting of votes will take place on May 23.