MUMBAI (Reuters) - The BSE Sensex surged 2.5 percent on Wednesday to its highest close since January 2011 as lenders such asHDFC 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 theReserve 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 GovernorDuvvuri 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.
"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 rising 3.8 percent and HDFC Bank gaining 3.7 percent.
Other interest rate-sensitive stocks also rose, with Housing Development and Finance Corporation Ltd jumping 4.5 percent and Maruti Suzuki India Ltd ending up 2.1 percent.
Tata Motors Ltd shares rose 2.9 percent after it said in a statement that global wholesales for its unit Jaguar Land Rover Ltd in April were 28,874 vehicles.
Oil and Natural Gas Corp Ltd gained 2.5 percent, up for a second day, on expectations the government would allow it to reduce the share of oil price subsidies provided to state refiners.
Cipla Ltd gained 3.1 percent, after shareholders of South Africa's Cipla Medpro overwhelmingly approved a $488 million takeover offer from the company.
Hindalco Industries Ltd rose 2.7 percent after unit Novelis Inc reported a quarterly profit on Tuesday, versus a year-earlier loss, boosted by stronger demand and better cost controls.
Havells India Ltd gained 3.5 percent after Nomura upgraded the stock to "buy" from "neutral," citing aggressive growth plans for fiscal 2014.
Among stocks that fell, Cummins India Ltd declined 1.3 percent, marking a third day of losses after its March-quarter earnings lagged estimates on Friday.
(Editing by Anupama Dwivedi)