Interest rate sensitive banks and realty stocks surged on Tuesday, pushing up BSE Sensex by 195 points after weak industrial output data for April bolstered hopes that Reserve Bank of India (RBI) will cut rates as early as this week.
After Standard & Poor's downgrade warning shaved off 51 points on Monday, the benchmark index opened nearly 100 points down and soon touched the day's low of 16,553.47.
However, banks, realty and capital goods counters soon attracted buying support as investor hopes of rate cut by RBI were boosted by a mere 0.1 per cent growth in industrial production for April.
Analysts said the central bank is now left with no option after flat growth in factory output.
"Today's weak industrial production reading increases the likelihood of a 50 bps rate cut" said Sonal Varma, Economist, Nomura India.
SBI, HDFC Bank and ICICI Bank gained in the range of 1.5-2 per cent and lifted the key index by 194.79 points, or 1.17 per cent, to 16,862.80 at close.
In 30-share BSE index, 25 closed higher while five ended lower. Gainers were led by Maruti Suzuki (3.48 per cent), Tata Motors (3.14 per cent), L&T (2.53 per cent) and Sterlite (2.51 per cent).
Brokers also said the rally on Tuesday was supported by Finance Minister Pranab Mukherjee's statement that government would take steps to give positive signals to the industry.
The market also ignored weakness in rupee as the currency breached the 56-level on Tuesday.
All eyes are on the May inflation data to be released on June 14.
"Thursday's May inflation print and core inflation reading, in particular, will be important for the RBI policy decision," said Siddhartha Sanyal, Chief India Economist, Barclays Capital.
The 50-share National Stock Exchange index Nifty rose by 61.80 points, or 1.22 per cent to 5,115.90 after touching the day's low of 5,015.15.