* BSE rises 0.42 pct, NSE gains 0.58 pct
* SENSEX posts highest close since late July 2011
* BSE to hit record high in 2013-Morgan Stanley
By Abhishek Vishnoi
MUMBAI, Sept 17 (Reuters) - India's main BSE index rose for a ninth consecutive session to its highest close since July 2011, as retailers such as Pantaloon and airlines such as SpiceJet surged after the government opened up the sectors to foreign direct investment.
Lenders such as ICICI Bank also rallied after the Reserve Bank of India cut the cash reserve ratio, or the amount of deposits the sector must keep with the central bank.
Although the RBI also disappointed some investors by keeping its main lending rate on hold, Indian shares held onto a big chunk of its earlier gains as the government's recent slew of measures signalled a strong willingness to act despite strong opposition from coalition allies.
Cyclical stocks extended recent gains, as these sectors are also expected to benefit as the Federal Reserve's new asset purchase programme unleashes additional liquidity, while previously favoured defensive stocks such as ITC slumped.
Still, analysts warned shares were susceptible to profit-taking in the short run, although they expected gains to continue over the medium-term.
"It has been a one way movement on Nifty but now it's time for some consolidation to kick in as most of the important events are behind us," said Sonam Udasi, head of research at IDBI Capital.
India's benchmark BSE index rose 0.42 percent, or 78 points, to 18,542.31 points, its highest close since July 25, 2011.
The 50-share NSE index rose 0.58 percent, or 32.4 points, to 5,610 points.
The recent measures from the government have led a slew of foreign banks to upgrade their targets for the BSE index, or SENSEX.
Deutsche Bank raised its December 2012 target for the BSE index to 20,000 while Citigroup raised its BSE target to 19,900 for June 2013 .
Morgan Stanley predicted the BSE would hit a record high next year, setting a new target for the index at 23,069 points by end-December 2013, which would smash the previous record high of 21,206.77 points hit in January 2008.
RETAILERS, AIRLINES SURGE
Indian retailers surged after the government will allow foreign supermarkets to buy up to 51 percent in a local partner.
Pantaloon Retail, partly-owned by India's biggest retailer Future Group, surged 18.9 percent, after already gaining 7.1 percent on Friday when investors had speculated government action was forthcoming.
Property developer DLF rose 6.9 percent, while mall operator Phoenix Mills gained 9.6 percent on hopes the government retail action might lead to increased demand for property.
Airlines surged after the government allowed foreign carriers to invest up to 49 percent in domestic companies.
SpiceJet rose 11.9 percent after already gaining 17.3 percent in the previous four sessions. Kingfisher Airlines surged 19.9 percent after gaining 17.3 percent in the prior three sessions.
Cable service provider Dish TV rose 2.6 percent after the government said it would raise FDI limits to 74 percent from the previous 49 percent.
Key stakeholders in power exchanges rose after India allowed up to 49 percent foreign investment into the sector. PTC India Financial Services, the promoter of Indian Energy Exchange, rose 6.2 percent.
ICICI Bank rose 5.2 percent, while State Bank of India rose 5.5 percent, as the RBI's cut in the cash reserve ratio is expected to have a more direct impact on liquidity and profitability in the banking system than a rate cut.
Blue chips also extended gains, especially those seen as more cyclical or high-beta. Reliance Industries rose 3.8 percent after gaining 5.3 percent on Friday, while Larsen & Toubro rose 4.4 percent after gaining 5.1 percent on Friday.
However, defensives were routed after being among the top performers this year given expectations they may not benefit in a post-QE3 environment.
Shares in cigarette maker ITC fell 5.5 percent after surging through most of the year, having hit a record high at 273.5 rupees on Aug. 30.
Software services exporters dropped after the rupee rose to four-month highs, raising worries about the impact on overseas profits.
Tata Consultancy Services fell 5 percent after hitting a record high of 1,439.80 rupees on Friday.
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FACTORS TO WATCH * Dollar pinned near 7-month low as Fed easing weighs * Oil steady over $116 as QE balances growth worries * Fed euphoria prompts risk rally * Foreign institutional investor flows * For closing rates of Indian ADRs
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