BSE Sensex posts biggest daily gain of 2014

By Indulal PM

MUMBAI (Reuters) - The BSE Sensex rose nearly 2 percent to post its biggest daily gain this year on expectations the Reserve Bank of India (RBI) will hold interest rates at the current levels and the U.S. Federal Reserve will keep its monetary policy loose for longer.

A second consecutive month of output contraction is likely to weigh when the RBI meets for its rate review on January 28.

Data later in the day is expected to show consumer prices eased in December, helped by waning food prices, solidifying the case for the RBI to keep interest rates on hold after data on Friday showed industrial output unexpectedly contracted in November.

"The near-term outlook for the market is firm. FIIs are continuously buying and supporting the rally. However, at the higher-levels, there could be some profit-taking. But the undercurrent remains positive," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.

"Markets expect RBI may keep rates on hold because of slow growth, which would be another positive in the near term," he said.

Foreign investors bought shares worth 681.6 million rupees on Friday, provisional exchange data showed.

Software services exporters lead gains with the BSE IT Index up 2.92 percent after Infosys reported better-than-expected quarterly results on Friday.

Banking stocks rose sharply, with State Bank of India gaining more than 2 percent and ICICI Bank up 3 percent. The bank index <.BSEBANK> gained 2.04 percent.

The Sensex closed 1.81 percent higher at 21,134.21, marking its biggest single-day gain since November 25.

The broader Nifty ended up 1.64 percent at 6,272.75, its biggest single-day gain since December 20.

Tata Motors rose 2.5 percent after key unit Jaguar Land Rover sold a record volume of vehicles last year.

Shares of oil and gas companies including Reliance Industries and Oil and Natural Gas Corp gained after the government officially notified a decision taken last year to change the pricing formula for domestic natural gas from April 1, removing the uncertainty on what effectively constitutes a price hike.

Shares in Ranbaxy Laboratories were sharply down, ending 5.4 percent lower, after the drug maker said the U.S. Food and Drug Administration (FDA) has raised concerns about the manufacturing practices at one of its facilities.

(Editing by Anupama Dwivedi)