Indian shares rallied to a near-two-month closing high on Wednesday as investors cheered the government's decision to scale back a controversial tax that had dogged trade since July 8, when the federal budget was presented.
Finance Minister Palaniappan Chidambaram told lawmakers a proposed 0.15 percent tax on the purchases of exchange-traded securities would only apply to the delivery of securities and that it would be split equally between the buyer and the seller.
His announcement that the tax would also not cover debt market trades sparked a relief rally in federal bonds, which recovered from lows hit earlier in the session amid worries about the medium-term outlook for local interest rates.
But the rupee extended its weak spell into a third session as the overseas dollar extended gains notched up after US Federal Reserve Chairman Alan Greenspan expressed optimism about the world's largest economy in Congressional testimony on Tuesday.
The Bombay Stock Exchange index rose 0.72 percent to 4,993.76 points, its highest close since May 27. Gainers outpaced losers 970 to 695 in volume of 123 million shares.
Chidambaram's concessions on the transaction tax gave the market a lift, but nagging worries about the monsoon capped gains.
Earlier, Indian Prime Minister Manmohan Singh said the rains had been below normal so far, mainly in north-western states. He said relief would be provided for any areas hit by drought. Index heavyweight and energy and petrochemicals major Reliance Industries Ltd was among the blue chips that gained on the tax relief, rising 1.4 percent.
Most software services firms were boosted by an improving global outlook for the technology sector. Wipro Ltd, the third-largest exporter, rose nearly 1 percent and Satyam Computer Services Ltd, the No 4, gained 2.5 percent.
The yield on the 10-year benchmark slid to 5.8368 percent, nearly 7 basis points lower than a morning high struck amid rate worries fuelled by Greenspan's upbeat testimony and a little more than 1 basis point down from its previous close.