Indian shares rose more than 2.5 percent on Thursday, marking their biggest daily gain in eight months, after blue chips led by interest rate-sensitive stocks surged on hopes the central bank's surprise rate cut will stoke growth.
The NSE bank index rose as much as 4.3 percent to a record high of 19,410.40 after the Reserve Bank of India cut interest rates by 25 basis point and signalled it could cut further, amid cooling inflation and the government's efforts to contain fiscal deficit.
Lower borrowing costs supported by a steep fall in commodity prices, especially crude oil, are expected to boost Prime Minister Narendra Modi's plans to kick-start investments and earnings in Asia's third largest economy.
The benchmark BSE index rose as much as 3.1 percent during the day before ending 2.66 percent higher.
The broader NSE index ended up 2.62 percent after earlier rising as much as 3 percent.
The indexes marked their biggest daily gains since May 9, 2014.
Still, traders said the size and scope of the government's upcoming budget will be a key factor in determining whether bonds rally further.
Efforts to contain the fiscal deficit, if accompanied by continued cooling in inflation, could spark a further rally in debt markets, according to analysts.
Morgan Stanley predicted the RBI could potentially cut rates by a further 125 bps over the next 12 months, including a possible 25 bps rate cut on February 3.
"We believe that this is a beginning of a big rate cut cycle," said Morgan Stanley in a report on Thursday.
"Our rate cut forecast is predicated on our view that CPI inflation will stay at closer to 5 percent of the calendar year 2015, as the reduction in fiscal deficit, sustained deceleration in rural wages and lower global commodity prices will mean that inflationary pressures in the economy will be contained."
The one-year rate was pricing in the prospect of an additional 75 bps in rate cuts over the next year.
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