Sensex heads for third day of gains ahead of Fed

MUMBAI (Reuters) - Indian stocks rose more than 1 percent on Wednesday, extending gains for a third session as investors feel markets have by now priced in an expected hike in U.S. interest rates later in the day.

The U.S. Federal Reserve is widely expected to announce a hike in interest rates when its two-day policy-setting meeting ends later in the day.

It would be the first U.S. rate hike in nearly a decade, signalling the beginning of an end to an expansionary monetary policy that has supplied a tidal wave of liquidity to risk asset markets globally.

"The market has already priced in a rate hike and we have corrected significantly, the problem will be if the Fed doesn't hike rates tonight," said Gaurang Shah, vice president at Geojit BNP Paribas.

"We won't see a runaway rally, we might see some minor sell-offs, but everyone is waiting for this (Fed meet) to get over."

The broader NSE index was 0.8 percent higher after rising as much as 0.98 percent earlier in the day.

The benchmark BSE index was 0.78 percent higher after rising as much as 1 percent earlier in the session.

Gains were widespread with ICICI Bank rising 2.17 percent and Infosys up 1.2 percent.

Among losers, utility vehicle maker Mahindra and Mahindra fell over 6 percent after India's top court ordered a temporary ban on the sale of large diesel cars in New Delhi as the country's highly polluted capital seeks ways to tackle one of its worst-ever bouts of toxic smog.

But shares of companies such as Indraprastha Gas rose 7.6 percent while GAIL (India) Ltd gained 5 percent as investors saw them as beneficiaries from the government's focus on cleaner fuel to tackle pollution.

(Reporting by Karen Rebelo in Mumbai; Editing by Subhranshu Sahu)