The BSE Sensex rose on Tuesday for a second straight session, led by rate-sensitive stocks such as ICICI Bank and Tata Motors, after the unexpected fall in July headline inflation boosted hopes for monetary easing by the RBI.
The gains came after India said the wholesale prices index rose by a lower-than-expected 6.87 percent in July from a year ago, marking its lowest level since November 2009, compared to the 7.25 percent gain in June. (Read main story, click https://bsmedia.business-standard.comin.reuters.com/article/2012/08/14/july-wpi-inflation-eases-idINDEE87D03M20120814)
That raised some expectations the Reserve Bank of India will have more room to cut interest rates at its next policy review in mid-September, after leaving interest rates on hold since April, as India's economy is growing at its weakest in almost a decade.
However, the gains were tempered as core inflation was estimated to have risen 5.44 percent in July, above 4.9 percent in June, while RBI Governor Duvvuri Subbarao on Monday reiterated his hawkish stance.
The government would also need to show more action on fiscal consolidation to sustain any gains in the stock market, analysts said.
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"Inflation is ticking down. That will help RBI look favourable on one data point, however a lot needs to be done in terms of fiscal control," said Vaibhav Sanghavi, director at Ambit Capital.
The fall in inflation is just the first step in the right direction and the RBI will need more cues before taking any concrete action, he said.
The Sensex ended up 0.54 percent at 17,728.20 points, marking its highest close since March 14. The 50-share Nifty rose 0.61 percent to 5,380.35 points.
ICICI Bank rose 2.2 percent while Tata Motors rose 3 percent.
Shares in Tata Steel gained 2.7 percent, despite reporting April-June net profit that missed estimates, as operating profit came in above expectations.
Brokerage Kotak said Tata Steel's consolidated EBITDA of 34 billion rupees was 10 percent ahead of its estimates.
World's biggest coal producer Coal India gained 1.75 percent after posting its highest-ever quarterly profit on Monday, on the back of strong sales and prices, taking some pressure off the state miner that is trying to curb operating costs and meet output targets.
Shares in battery maker Amara Raja rose 14.3 percent, its biggest single day gain since May 2009, after the company's June-quarter profit jumped 95 percent to 761 million rupees.
Shares in Opto Circuits fell 1.4 percent after earlier falling as much as 11.6 percent. The health care equipment maker continued to reel after credit agency ICRA last week suspended the rating assigned to a 5.38 billion rupees facility by Opto, citing concerns about its "stretched liquidity position.
Opto's chief executive responded on Tuesday with a statement, questioning the basis with which ICRA had drawn its conclusions.
Shares in Lanco Infratech fell 3.1 percent after the infrastructure developer swung to a consolidated net loss of 4.41 billion rupees in the April-June quarter from a year earlier.
Shares in India's Suzlon Energy fell 4 percent, to make a record low on Tuesday, a day after the company said it swung to a net loss in the April-June quarter.