Sensex gains over 700 points, heads towards biggest daily gain in 8 months

MUMBAI (Reuters) - The BSE Sensex and Nifty rose 2.5 percent on Thursday, heading towards their biggest daily gain in more than eight months, after blue-chips including interest rate sensitive stocks surged on hopes the Reserve Bank of India's surprise rate cut will stoke growth.

The RBI surprised markets with a 25 basis point cut in interest rates on Thursday and signalled it could do more, amid signs of slowing inflation and what it said was a government commitment to contain the fiscal deficit.

The NSE Bank index surged 4.3 percent to a record high of 19,410.40 as the rate cut is expected to stoke credit growth and lower cost of funds.

The RBI's 25 basis point cut in interest rates will help revive capital investments in Asia's third-largest economy, Finance Minister Arun Jaitley said on Thursday.

"The rate cut surprise was just in timing not in direction. Inflation will likely remain subdued so one should expect another 75 basis points cut over the course of this year," said Hemant Kanawala, head of equity at Kotak Life Insurance.

The benchmark BSE Sensex rose as much as 2.5 percent, while the broader Nifty gained 2.53 percent, both heading towards their biggest intraday gains since May 9, 2014.

Investors expect continued focus by RBI and the government on reviving economic growth in Asia's third largest economy after a steep fall in commodity prices, especially crude oil, of which India imports nearly two-thirds of its requirement.

Banks led the gains. ICICI Bank rose 5.7 percent while State Bank of India gained 6.2 percent.

Real estate developers surged among other interest rate sensitive stocks. DLF Ltd soared 10.6 percent while Unitech surged 9 percent.

(Reporting by Abhishek Vishnoi; Editing by Anupama Dwivedi)