Sensex rises after two days of falls; sentiment cautious

MUMBAI (Reuters) - India's stock markets rose on Wednesday as investors selectively picked up stocks such as HDFC Bank that had been hit hard in the previous session when indexes fell more than 2 percent.

Still, sentiment remained broadly cautious as Asian shares looked set for their biggest single-day fall in a month after a private survey showed activity in China's factory sector shrank for a seventh straight month to its weakest level in 6-1/2 years.

Caution ahead of the expiry of derivatives contracts on Thursday and the Reserve Bank of India's policy review next week also weighed on sentiment.

Also raising concerns are signs of heavy selling by foreign investors in emerging markets ahead of likely U.S. Federal Reserve rate hikes later this year. Overseas funds have sold a net $352.59 million in Indian shares so far in September after record monthly sales in August.

"The stability in currency and inflow of money into emerging markets need to be watched. Current players are withdrawing from all EMs, including India," said Deven Choksey, managing director of K. R. Choksey Securities

The broader Nifty was up 0.64 percent at 1:45 p.m. (0815 GMT), while the benchmark BSE Sensex rose 0.84 percent.

Both indexes had fallen more than 2 percent on Tuesday to post their biggest single-day falls since Sept. 4 and a second consecutive losing session.

Some of the shares hit hard on Tuesday were among the leading gainers on Wednesday.

ICICI Bank rose 0.9 percent after slumping 3.1 percent on Tuesday, while HDFC Bank gained 1.4 percent after falling 2.1 percent in the previous session.

Cigarette maker ITC rose 2 percent after falling 3.1 percent over the previous three sessions.

(Reporting by Rafael Nam and Abhishek Vishnoi; Editing by Anand Basu)