The Sensex rose on Tuesday after the US averted the looming 'fiscal cliff' in a last-minute deal with hopes of a rate cut by the Reserve Bank of India (RBI) beginning to gather steam, leading to gains in bank shares.
Analysts say with the New Year Day holidays, US Congress still has time to draw up legislation and backdate it to avoid the harsh fiscal measures including tax hikes and spending cuts, which many fear could cripple the world economy in 2013.
While stocks are expected to remain firm in January tracking expectations of a rate cut by RBI, negative local fundamentals, namely twin deficits and sticky inflation, may limit the outperformance in the near term.
“While the macro environment both domestically and globally does not inspire much confidence, at the micro level things are looking good," said Atul Kumar, Senior Fund Manager at Quantum Asset Management Company Pvt Ltd.
The fiscal deficit is likely to exceed the target set by the government due to higher subsidy burden, which can also turn into a constraint for RBI to cut rates, added Kumar.
The benchmark Sensex rose 0.79 per cent, or 154.10 points, to end at 19,580.81 after earlier hitting its highest level intraday since April 27, 2011.
The broader NSE Nifty rose 0.77 per cent, or 45.75 points, to end at 5,950.85.
Option traders see the probability of the 50-stock index Nifty inching closer to 6,200 levels in the January derivative series which ends on January 31.
ICICI Bank ended up 1.8 per cent, while State Bank of India ended 1.7 per cent higher.
Shares in steel companies including Tata Steel gained on expectations of better realisations, as China plans to scrap a 40 per cent export duty on metallurgical coke, a steelmaking raw material, from on Tuesday.
Tata Steel gained 2.3 per cent, while Jindal Steel and Power ended three per cent higher.