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The BSE Sensex edged up on Tuesday, as lenders such as State Bank of India and Axis Bank gained after the wholesale inflation index eased to its lowest in more than three years, spurring hopes the Reserve Bank of India (RBI) would continue to cut rates.
Headline inflation fell below five per cent in April, dropping within the central bank's comfort zone and raising expectations RBI will deliver more rate cuts, after already easing for a total of 75 basis points so far this year.
Shares thus recovered after posting their biggest daily percentage fall in about a year yesterday. They were also helped by Asian shares, which steadied after a two-day losing streak after a surprising rise in US retail sales boosted optimism about the world's largest economy.
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Still, analysts were cautious about whether shares could gain much further after rising for four weeks, given concerns about other areas of the economy, including data yesterday showed, a spike in the trade deficit.
"Inflation reading is good, but the market may remain range-bound in the near term, due to the disappointing trade deficit and potential election worries," said Vijay Kedia, director at private wealth management firm Kedia securities.
The benchmark Sensex rose 0.16 per cent, or 30.62 points, to end at 19,722.29.
The broader Nifty rose 0.25 per cent, or 14.95 points, to close at 5,995.40.
Before yesterday's fall, shares had rallied for four weeks, sending the Sensex to its highest close since January 2012 and the Nifty to its highest close since January 2011, as of Saturday.
Banks were among the leading gainers on Tuesday, after data showed the wholesale price index for April rose 4.89 per cent from a year earlier. Data yesterday showed consumer prices had also eased last month.
State Bank of India rose 0.7 per cent, while Axis Bank gained 1.1 per cent.
RBI cut interest rates on May 3 but disappointed investors with a more hawkish tone on future action.
Oil and Natural Gas Corp and Oil India also gained on expectations the government would allow them to reduce the share of oil price subsidies provided to state refiners.
