The BSE Sensex jumped nearly 4 per cent on Tuesday, its biggest single-day gain since May 2009, led by blue chips, as receding fears of a U.S.-led military strike on Syria and a sturdier rupee sparked hopes about foreign investor flows.
Shares posted their fourth consecutive session of gains to send the indexes to their highest since late July, after foreign institutional investors (FIIs) bought nearly 20 billion rupees worth of cash shares in the previous three sessions.
The foreign buying, and subsequent gains in shares as well as the rupee, comes after Raghuram Rajan took over as the new governor of the Reserve Bank of India on September 4 and announced a slew of measures to support the currency and open up markets.
Hopes that Rajan will unveil more market-friendly measures were further boosted after the RBI, late on Friday, made it easier for foreign promoters of domestic listed companies to increase their stakes via share purchases.
Traders are also hoping the government will announce steps over the next few days to curb non-essential imports, with expectations also growing for a hike in subsidised diesel prices, which would ease concerns about the government's finances.
"The RBI steps aiding FII flows and Syria threat receding are driving shares higher. It seems people are getting confident of at least the RBI's plans, if not government's," said Deven Choksey, managing director, K R Choksey Securities.
The broader Nifty rose 3.81 per cent, or 216.35 points, to end at 5,896.75, posting its highest close since July 25.
The Sensex gained 3.77 per cent, or 727.04 points, to end at 19,997.10, to its highest close since July 24.
The gains also tracked higher global shares on receding expectations of U.S.-led military action against Syria and better-than-expected industrial output and retail sales data from China.
In India, data showed the trade deficit in August narrowed to $10.9 billion, with exports surging 13 per cent and imports remaining flat. Although that was wider than some expectations, the narrowing deficit was still seen boding well for the troubled rupee.
Among blue chip shares, Housing Development Finance Corp rose 6.4 per cent, while ITC gained 6.2 per cent.
Shares of Larsen & Toubro gained 7 per cent after Goldman Sachs added the stock to its "conviction buy list," citing valuations and growth potential among other factors.
Tata Motors rose 10 per cent to its all-time high of 349.70 rupees after its unit Jaguar Land Rover unveiled a $2.4 billion investment in a new range of lightweight aluminium sports and cross-over cars aimed at the mass market.
Shares in companies owned by foreign promoters also rallied after the central bank said on Friday it would allow non-residents to buy stocks of listed domestic firms through the foreign direct investment route.
The new rule would make it easier for foreign promoters, who were earlier able to raise their stakes only through separate processes such as open market offers, to buy shares in listed companies.
ABB India jumped 17.43 per cent, while Siemens gained 7.8 per cent and United Spirits rose 3.9 per cent.
However, among stocks that fell, Cairn India Ltd dropped 1.2 per cent as the oil benchmark dropped to a one-week low below $113 a barrel earlier on Tuesday after Russia offered to help put Syria's chemical weapons under international control, calming worries of a potential U.S.-led strike against the country.