Sensex climbs to 2-week high as inflation at historic low

India's benchmark stock index advanced to a two-week high after factory output and inflation data signalled an improving outlook for Asia's third-biggest economy.

The deflationary trend continued for the 10th month, with the inflation plunging to a historic low of minus 4.95 per cent in August.

Tata Steel Ltd climbed to a one-month high after the Press Trust of India reported that the board of safeguards had upheld a plan to levy an import duty on some steel products. Vedanta Ltd, the largest copper producer, and NTPC Ltd, the top power generator, were the best performers on the S&P BSE Sensex. State Bank of India and Axis Bank Ltd paced gains among lenders, as a drop in the inflation rate improved odds for a rate cut by the central bank.

The Sensex surged one per cent to 25,856.7 at the close, extending last week's 1.6 per cent increase. The first of the country's two main inflation gauges due Monday showed a deepening price decline, while industrial output in July expanded faster than expected, data showed on Friday. The Federal Open Market Committee will meet this week to decide on US interest rates.

"The wholesale price inflation has reconfirmed to the Street that consumer price inflation would be lower than expected," Aneesh Srivastava, the chief investment officer at IDBI Federal Life Insurance Co, said by phone from Mumbai. Some traders also closed bearish bets before the Fed meeting, adding to the rally, he said.

Wholesale prices declined 4.95 per cent in August from a year earlier, after falling 4.05 per cent in July. The median of 32 economists in a Bloomberg survey had predicted a 4.4 per cent drop.

Rate decisions
The Federal Open Market Committee will meet this week to decide whether to raise borrowing costs for the first time since 2006, with traders holding odds of an increase at 28 per cent. Reserve Bank of India Governor Raghuram Rajan has resisted growing pressure from the government to ease monetary policy amid cooling inflation, leaving rates unchanged in August. His next policy review is scheduled on September 29.

Tata Steel surged 3.8 per cent, paring this year's loss to 39 per cent. Steel Authority of India increased two per cent and JSW Steel Ltd jumped 3.1 per cent. Vedanta increased 4.4 per cent to its highest since August 19. NTPC jumped 5.2 per cent to a three-week high. State Bank of India gained 2.2 per cent, while Axis Bank advanced 3.1 per cent.

The India VIX index, the benchmark measure of equity-option prices, fell 2.6 per cent. The 50-stock CNX Nifty Index rose 1.1 per cent to 7,872.25.

International investors sold a net $5.6 million of Indian stocks on September 10, paring this year's inflows to $3.6 billion. The Sensex trades at 14.7 times projected 12-month earnings, compared with a multiple of 10.7 for the MSCI Emerging Markets Index.