By Abhishek Vishnoi
MUMBAI (Reuters) - The BSE Sensex surged 2.5 percent on Wednesday to its highest close since January 2011 as lenders such as HDFC Bank rallied after the RBI governor said he had taken note of falling inflation, reinforcing bets about future rate cuts.
The gains made up for Monday's steep falls, when investors were taken aback after a jump in gold and oil imports led to a spike in April's trade deficit, raising concerns about the current account deficit.
However, those worries have been offset by expectations the Reserve Bank of India could cut interest rates as early as June after data showed wholesale price inflation eased sharply last month.
The rate cut hopes were given a further boost after RBI Governor Duvvuri Subbarao said on Tuesday the fall in inflation would be taken into account for future policy decisions, in what the markets interpreted as a shift in stance.
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"Falling inflation giving rise to rate cut hopes amid global liquidity, a better-than-expected Q4 earnings season and falling commodity prices are contributing to strong markets," said Paras Adenwala, MD & Principal Portfolio Manager, Capital Portfolio Advisors.
Banking and financial stocks will continue to lead on rate cut expectations and a growing opinion that the Indian economy has bottomed out, added Adenwala.
The BSE Sensex rose 2.49 percent, or 490.67 points, to end at 20,212.96, its highest close since January 2011, posting its biggest single-day percentage gain since June 2012.
The broader Nifty rose 2.52 percent, or 151.35 points, to end at 6,146.75, posting its biggest single-day gain since September 2012.
Gains in stocks this month have also been aided by a global market rally, sparked by easier monetary policy, that has led to a surge in foreign investments in domestic markets.
Foreign investors have been net buyers of stocks for 19 consecutive sessions as of Tuesday, regulatory data shows, bringing their total for the year to $12.90 billion.
Lenders led gainers, with ICICI Bank Ltd
Other interest rate-sensitive stocks also rose, with Housing Development and Finance Corporation Ltd
Tata Motors Ltd
Oil and Natural Gas Corp Ltd
Cipla Ltd
Hindalco Industries Ltd
Havells India Ltd
Among stocks that fell, Cummins India Ltd
(Editing by Anupama Dwivedi)