Indian shares gained for a second consecutive session after the central bank lowered minimum bond holding requirements for lenders to spur investment, sending blue-chips such as mortgage lender HDFC and Tata Motors higher.
The Reserve Bank of India kept its key policy repo rate unchanged on Tuesday as widely expected, but cut the statutory liquidity ratio by half a percentage point to 22.0 percent of deposits, effective from Aug. 9.
Experts say the cut in SLR is a positive step. "The Governor has cut the SLR, while expressing his confidence that the Government will bring down the fiscal deficit. The SLR could have a positive impact on the profitability of the banks. It will boos the supply. However, it is too early to gauge the impact of the policy on the interest-rate sensitive sectors," said Raamdeo Agrawal, joint managing director at Motilal Oswal Financial Services.
Sentiment was got a boost after overseas investors, who were supporting a 22.9 percent rally in India's broader NSE index so far this year, turned buyers on Monday after selling $494.7 million worth of Indian shares in the previous three sessions.
Foreign investors bought Indian shares worth $61.10 million on Monday, exchange and regulatory data showed.
"RBI policy was quite pragmatic one and is anticipating a growth revival. The focus is shifting from just inflation management to facilitate revival of growth in the economy. And the market has taken it in its full-sense," said Deven Choksey, managing director at KR Choksey Securities.
The benchmark BSE index gained 0.72 percent to 25,908.01 points, while the broader NSE index added 0.82 percent to 7,746.55 points.
Hopes that increased lending after the RBI measures would help spur investment lifted some blue-chips.
Auto stocks were among the leading gainers. Mahindra and Mahindra Ltd gained 3.8 percent, while Bajaj Auto Ltd closed up 3.2 percent and Tata Motors Ltd added 2.3 percent.
Real-estate stocks also gained. DLF Ltd was up 2.2 percent while Unitech Ltd added 6.6 percent.
Lenders also rose, with State Bank of India adding 0.5 percent, Bank of Baroda ending up 1.2 percent and Union Bank of India closing 1.9 percent higher.
Among other gainers, Cummins India ended 7.04 percent higher as analysts said the company management has raised revenue guidance.
However, shares in Tata Communications Ltd closed down 2.4 percent after the company reported a net loss in the June quarter.
Among other decliners,