Sensex rises in special trading session on Diwali

MUMBAI (Reuters) - The Sensex made modest gains in a special 'muhurat' one-hour trading session for Diwali on Wednesday, spurred on by a string of economic reforms aimed at drumming up foreign investment in a range of industries.

Prime Minister Narendra Modi's government announced on Tuesday a relaxation of foreign direct investment rules in 15 sectors, including mining, defence, civil aviation and broadcasting, in a bid to encourage investment and speed growth.

Analysts said the move on the eve of one of India's biggest holidays was aimed at taking back the reform initiative following the ruling party's humiliating defeat on Sunday in a state election.

Shares touched a six-week low on Monday after Modi's heavy defeat in the Bihar elections raised concerns that his government will struggle to pass policy reforms.

Dismal corporate earnings in the second quarter have also dampened sentiment.

The Sensex ended 0.48 percent higher while the Nifty gained 0.54 percent on Wednesday to snap out of a five-session losing streak.

Gains were lead by Axis Bank, up 2.56 percent, Sun Pharma, up 2 percent and Larsen & Toubro, up 1.29 percent. Meanwhile, cigarette maker ITC fell 0.74 percent.

Traders believe gains made during the 'muhurat', or auspicious time, bring prosperity and wealth in the year ahead.

Both the Nifty and the Sensex had chalked up losses in 11 out of 12 sessions until Tuesday.

Meanwhile, Asian stock were largely flat on Wednesday after a mixed batch of Chinese data showed growth in the world's second-biggest economy was still in low gear.

Indian markets are expected be to remain volatile heading towards the end of the year, with the winter session of parliament beginning later this month and the U.S. Federal Reserve's policy meet on December 16 likely to influence the direction of the markets.

The head of RBI warned on Tuesday that a rate hike by the Fed in December could upset markets but that it was nonetheless necessary.

The markets will be shut on Thursday and resume trading on Friday.

(Reporting by Karen Rebelo in Mumbai, editing by Louise Heavens)