The benchmark Sensex shot up to an almost three-year high today, jumping 359 points as investors cheered the RBI decision to increase a key policy rate to tame inflation and at the same time enhance liquidity for banks.
Financial stocks ICICI Bank, HDFC Bank, HDFC and State Bank of India contributed to almost half of the Sensex's gains. Auto stocks Maruti Suzuki and Mahindra & Mahindra were among the top gainers on the index.
All 13 BSE sectoral indices advanced, led by interest rate-sensitive bank, realty and auto shares.
The 30-share S&P BSE Sensex initially traded in a narrow range and surged after the RBI policy review to settle at 20,929.01, a gain of 358.73 points or 1.74 per cent. It was the highest close since the index finished at 20,932.48 on November 9, 2010.
The Sensex had tumbled 324 points over the previous five sessions.
The 50-share CNX Nifty on the National Stock Exchange flared up 119.80 points, or 1.96 per cent, to end at an almost three-year high of 6,220.90. The SX40 on the MCX Stock Exchange closed 195.44 points higher at 12,445.13.
Central bank Governor Raghuram Rajan said it was important to break the spiral of rising price pressures to curb the erosion of financial savings and strengthen the foundations of growth.
"The market agrees with Rajan's decision that inflation must be tamed before we focus on growth," said Shrinivas Viswanath, co-founder of RKSV. "We may be on the path towards recovery as many things seem to be falling in place."
The RBI seems to be tackling WPI inflation and the FY15 growth forecast pretty aggressively, said Viswanath.
The RBI increased the policy repo rate to 7.75 per cent and cut the marginal standing facility rate to 8.75 per cent, as was widely expected. It also increased liquidity provided through seven-day and 14-day term repos.
Short-covering ahead of the expiry of October futures and options contracts on Thursday also aided market sentiment.
