India's key share index leapt to a five-and-a-half-month high on Monday on optimism about corporate profits and expectations of rising foreign investment in an economy which grew 7.4 percent last quarter.
The stock market rally pushed the rupee higher, and federal bonds lost ground on a view that the robust economic growth would keep inflation hovering around 8 percent, forcing the central bank to raise interest rates off three-decade lows.
The 30-issue Mumbai share index gained 1.6 percent to 5,766.30 points, its best close since April 23, building on Friday's 1.65 percent rise.
Investors expect to see strong growth when front-line Indian companies start rolling out earnings for the three months ended September within the next week.
"Most people are expecting corporate profits to be strong. A pick-up in foreign inflows ahead of reporting season too has boosted sentiment," said Sashi Krishnan, chief investment officer at Cholamandalam Asset Management. "The mood is generally buoyant due to strong GDP growth numbers released last week."
Foreign funds bought a net $601.2 million worth of shares last month, the most since April. A shock election victory by the Congress party in May worried many foreign investors, but they have slowly returned to Indian shares on expectations of steady demand in an economy expected to grow 6 percent this fiscal year.
Software leader Tata Consultancy Services Ltd gained 2.7 percent and Infosys Technologies Ltd, the second-biggest software services exporter, gained 1.4 percent.
Grasim Industries Ltd, India's biggest cement group by capacity, added 1.2 percent to close at a five-month high after reporting a 12.6 percent rise in September shipments.
Bonds trimmed early losses after Finance Minister Palaniappan Chidambaram said central banks should approach interest rate rises cautiously since inflationary pressures were supply driven.
The benchmark 7.37 percent 2014 bond yield was at a fresh six-week high of 6.4256 percent, up from Friday's close of 6.3787 but off a high of 6.5010 percent earlier.
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