The BSE Sensex rose on Tuesday after the U.S. averted the looming 'fiscal cliff' in a last-minute deal with hopes of a rate cut by the Reserve Bank of India beginning to gather steam, leading to gains in bank shares.
Analysts say with the New Year Day holidays, U.S. 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 Indian stocks are expected to remain firm in January tracking expectations of a rate cut by the Reserve Bank of India, 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 the RBI to cut rates, added Kumar.
The benchmark Sensex rose 0.79 percent, or 154.10 points, to end at 19,580.81 after earlier hitting its highest level intraday since Apr. 27, 2011.
The broader NSE Nifty rose 0.77 percent, 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.
Banking stocks including ICICI Bank rose on expectations of a cut in interest rates by the Reserve Bank of India in January.
ICICI Bank ended up 1.8 percent, while State Bank of India ended 1.7 percent higher.
Shares in Indian steel companies including Tata Steel gained on expectations of better realisations as China plans to scrap a 40 percent export duty on metallurgical coke, a steelmaking raw material, from Tuesday.
Tata Steel gained 2.3 percent while Jindal Steel and Power ended 3 percent higher.
Shares in Glenmark Pharmaceuticals gained 1.9 percent after U.S. health regulators approved Salix Pharmaceuticals Ltd's drug to treat diarrhoea in HIV/AIDS patients on qantiretroviral therapy, a combination of medicines used to treat HIV infection.
Aurobindo Pharma Ltd rose 2.14 percent after it said in a statement that it has got final approvals from U.S. FDA for Rizatriptan Benzoate tablets and the product is ready for launch.
However, among stocks that fell, oil marketing companies fell on fading hopes of a hike in diesel price any time soon, dealers said.
Indian Oil Corp. fell 1.2 percent while Hindustan Petroleum Corporation ended 0.4 percent lower.