mumbai 06 12, 2012, 18:25 IST
The BSE Sensex rose 1.2 percent on Tuesday to its highest close in over a month after weak output data raised hopes the RBI will cut interest rates, and possibly even the cash reserve ratio, in a bid to bolster the economy.
Banks were among the leading gainers, also helped after Financial Services Secretary D.K. Mittal said state-run banks would welcome a 1 percentage point cut in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI).
The comments cemented expectations for some type of action from the RBI at its policy meeting on June 18, after industrial production in April barely grew at 0.1 percent from a year earlier, according to data out on Tuesday.
India is facing a number of challenges across multiple fronts, with growth slowing sharply in the first three months of the year. The country is also at risk of losing its investment grade status from Standard & Poor's.
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"I think RBI would cut rates and CRR given the current situation, but more important is how India manages its fiscal deficit issues," said Vijay Kedia, managing director of investment firm Kedia Securities.
"It's a wake up call for government for some structural policy action as GDP, IIP and all other indicators are singing the same song," he added.
The Sensex rose 1.17 percent to 16,862.80 points, its highest close since May 7 after recovering from a session fall of as much as 0.7 percent.
The benchmark index has now gained for the sixth out of past seven sessions, and is up 4 percent so far in June, recovering steadily from steep falls in May when the rupee tumbled to a series of record lows against the dollar.
The broader 50-share Nifty gained 1.22 percent to 5,115.90 points.
Inflation data on Thursday will be key in adjusting interest rate expectations. A Reuters poll shows the wholesale price index likely accelerated to 7.60 percent in May from a year ago, the fastest pace this year.
Higher WPI could cloud the outcome of the RBI's policy meeting given the central bank has previously expressed concerns about inflationary pressures.
Nonetheless, stock investors are betting the RBI will have to take further steps to revive growth after last cutting the repo rate by 50 basis points in April and the cash reserve ratio in early March.
Banking shares, as measured by the NSE banking index, gained 1.71 percent and have added 7.4 percent so far this month.
State Bank of India gained 1.9 percent, while prrivate lenders ICICI Bank and HDFC bank rose about 1.4 percent each.
Rate-sensitive auto shares also rallied on hopes that lower interest rates will help lower financing costs for vehicles. Tata Motors gained 3.2 percent.
Property firms also advanced, with DLF , India's biggest real estate company, gaining 2.6 percent, while Housing Development & Infrastructure added 3.8 percent.
Shares in India's state-owned power sector lenders rose on hopes that power distribution companies would be allowed to raise electricity tariffs, thereby improving their loan repayment capabilities.
Shares in Power Finance Corporation and Rural Electrification Corp rose over 2 percent each.
(Additional reporting by Abhishek Vishnoi)