Indian shares rallied to their highest close since mid-March led by gains in private sector banks such as ICICI Bank on hopes improving asset quality would lead to better-than-expected earnings in the upcoming reporting season. Sentiment was also boosted by data showing foreign institutional investors (FIIs) remained buyers of Indian stocks this month, helping domestic indexes rebound after two previous sessions of mild falls.
The gains on Tuesday outperformed most Asian indexes, though analysts have warned they expect muted earnings growth in the April-June quarter, which may lead to a correction, particularly if the guidances provided fails to inspire.
"We are expecting flat earnings this quarter. It will not be even double digit growth yoy" Sudip Bandyopadhyay, CEO of Destimoney Securities Pvt.
The 30-share BSE index rose 1.3 percent to 17,618.35 points, the highest close since March 15, more than offsetting the 0.8 percent fall over the previous two sessions. The 50-share NSE index gained 1.33 percent to 5345.35 points.
Investors were encouraged after provisional exchange data showed FIIs were net buyers of 2.5 billion rupees ($44.74 million) in Indian shares on Monday, for a preliminary total of 58.2 billion rupees for the month.
Those purchases come despite recent concerns about lower-than-expected rainfalls during the monsoon season, which could depress rural consumption and lead to higher food prices given the impact on agricultural output.
Deutsche Bank said last week total revenue would grow by 16.4 percent in the April-June quarter from a year earlier, below 20 percent for the second quarter in a row, due to pressures from a slowing economy. The bank expects after-tax profit growth for the BSE members to be curtailed at 9.6 percent.
Still, investors are seeing pockets of winners. Private sector lenders were among the top gainers on Tuesday on hopes that asset quality would improve, allowing the sector to boost better-than-expected earnings.
ICICI Bank rose 1.4 percent to 942.90 rupees after
Bank of America-Merrill Lynch raised its price objective to 1,200 rupees saying asset quality may be "much better than expected" and could lead to a "re-rating of the stock" after meeting the CEO of India's biggest private lender.
Among other private lenders, Axis Bank rose 3.8 percent.
Mortgage lender HDFC shares rose 0.9 percent ahead of its earnings results on Wednesday.
Bargain-hunting in recent under-performers also boosted some blue chips. Auto makers gained even after an industry body slightly lowered its forecast for the current fiscal year ending in March, as traders said a weaker outlook has been factored in to some extent.
Tata Motors rose 2.4 percent. Shares in India's second biggest auto maker have under-performed the broader indexes since the start of May.