By Abhishek Vishnoi
MUMBAI (Reuters) - The BSE Sensex rallied on Wednesday to mark its highest close in five weeks as rate-sensitive stocks such as ICICI Bank rose after data showing sharply easing inflation reinforced expectations the Reserve Bank of India (RBI) will keep interest rates on hold.
Headline inflation eased to a five-month low of 6.16 percent in December, helped by a softening in vegetable prices, data released Wednesday showed.
The drop in wholesale inflation came on the back of the fall in retail inflation to a three-month low, reinforcing expectations of a status quo by the Reserve Bank of India at its policy review meet on January 28.
After raising interest rates by 50 basis points over September and October, RBI Governor Raghuram Rajan held rates steady last month, saying inflation data would largely determine the outlook for interest rates.
Gains also tracked higher Asian shares on Wednesday as the World Bank upgraded its outlook for the global economy, while the dollar extended gains in the wake of surprising strength in U.S. consumer spending.
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"More upside can be seen in Indian equities, led by banking and consumer durable stocks as rate reduction chances are brightening. RBI has also managed growth and the currency part well," said Deven Choksey, managing director at KR Choksey Securities.
The benchmark BSE Sensex rose 1.22 percent, or 256.61 points, to end at 21,289.49, marking its highest close since December 9.
The broader Nifty rose 1.27 percent, or 79.05 points, to end at 6,320.90, closing above the psychologically important 6,300 level for the first time since January 1.
Rate-sensitive stocks led the gains after headline inflation eased.
ICICI Bank Ltd rose 2.1 percent, while Housing Development Finance Corp gained 2.7 percent.
Among auto stocks, Tata Motors Ltd gained 1.5 percent, while Hero MotoCorp Ltd rose 1.8 percent.
Software exporter Tata Consultancy Services Ltd gained on optimism ahead of quarterly results on Thursday after Infosys Ltd. surprised investors with a profit beat last week.
Tata Consultancy Services rose 1.2 percent, while HCL Technologies Ltd gained 0.7 percent.
HCL Technologies Ltd may beat consensus earnings per share forecast for the October-December quarter when it reports results on Thursday, Thomson Reuters StarMine's SmartEstimates showed.
State-run Coal India Ltd gained 2.2 percent after the company said on Tuesday it would pay an interim dividend of 29 rupees a share, or 183.2 billion rupees, in the current fiscal year.
Among stocks that fell, Ranbaxy Laboratories fell 2.4 percent, slumping 11.6 percent over three days after the U.S. Food and Drug Administration raised concerns about manufacturing practices at one of its factories.
Drugmaker Lupin Ltd fell 1 percent after its competitor Allergan INC said a court ruled in its favour in a patent infringement case on a key drug.
(Editing by Prateek Chatterjee)