Sensex posts biggest gain in 3 months on rate cut hopes

By Manoj Dharra

MUMBAI (Reuters) - The BSE Sensex posted on Tuesday its biggest daily percentage gain this year on growing hopes the Reserve Bank of India (RBI) will cut interest rates later this month, which boosted rate-sensitive stocks such as ICICI Bank and Tata Motors.

The gains were in line with global shares that rebounded sharply, reclaiming most of the previous day's steep losses, as investors bet major central banks would decide to keep monetary policy loose at meetings this week.

However, India's record-high current account deficit remains a key worry as it is increasing the dependence on foreign investments, the government's top economic adviser said on Tuesday, making the country vulnerable to a sudden stop and reversal in fund inflows.

"Buying from FIIs continued on Tuesday while partially it was short covering as it was an oversold market, but volatility levels suggest there is still caution," said Deven Choksey, managing director, KR Choksey Securities.

The benchmark BSE Sensex rose 1.4 percent, or 265.21 points, to end at 19,143.17, a day after ending near the lowest close since November 27, hit on Thursday.

The broader Nifty rose 1.5 percent, or 85.75 points, to end at 5,784.25.

The RBI's policy will decide the momentum for the market even as India's finance minister continues to assure on growth, Choksey added.

Among rate-sensitive shares that gained, ICICI Bank Ltd rose 3.3 percent and Tata Motors was up 3.7 percent.

Credit Suisse said in a report that India has joined "the Cheapest-4 club" as of Tuesday, meaning it is among the four most inexpensive markets in the Asia ex-Japan region. The report highlighted Tata Motors Ltd , Reliance Industries Ltd , Bank of Baroda and Sterlite Industries (India) Ltd , citing valuations.

Reliance Industries shares ended 1.7 percent higher, rising for the second day, after Morgan Stanley upgraded the stock on expectations of an improvement in core business.

Shares in Dr Reddy's Laboratories rose 1.6 percent after the pharma company launched its Zoledronic Acid injection in the United States.

Export-driven stocks, such as technology and pharma companies, gained tracking weakness in Indian rupee. Tata Consultancy Services rose 1.8 percent while Cipla shares ended 2.9 percent higher.

Shares in Zee Entertainment Enterprises Ltd fell 0.45 percent after UBS downgraded the stock to "sell" from "buy", citing expectations of bigger losses from sports-related TV channels in fiscal 2013/14 as well as increased losses from new investments in channels.

J.P. Morgan Securities lowered its rating on India's Bajaj Auto Ltd to "underweight" from "neutral" and cut its target price to 1,800 rupees from 2,060 rupees, citing a weakening outlook for two-wheeler sales growth due to rising fuel prices and high inflation.

Shares in Bajaj Auto fell 0.79 percent.

(Additional reporting by Abhishek Vishnoi; Editing by Jijo Jacob)