The BSE Sensex edged up on Tuesday as lenders such as State Bank of India and Axis Bank gained after the wholesale inflation index eased to its lowest in more than three years, spurring hopes the RBI would continue to cut rates.
Headline inflation fell below 5 percent in April, dropping within the central bank's comfort zone and raising expectations the Reserve Bank of India will deliver more rate cuts after already easing for a total of 75 basis points so far this year.
Indian shares thus recovered after posting their biggest daily percentage fall in about a year on Monday. They were also helped by Asian shares, which steadied after a two-day losing streak after a surprising rise in U.S. retail sales boosted optimism about the world's largest economy.
Still, analysts were cautious about whether shares could gain much further after rising for four consecutive weeks given concerns about other areas of the economy, including data on Monday that showed a spike in the trade deficit.
"Inflation reading is good, but the market may remain range-bound in the near term due to the disappointing trade deficit and potential election worries," said Vijay Kedia, director at private wealth management firm Kedia securities.
The benchmark Sensex rose 0.16 percent, or 30.62 points, to end at 19,722.29.
The broader Nifty rose 0.25 percent, or 14.95 points, to close at 5,995.40.
Before Monday's fall, Indian shares had rallied for four-weeks, sending the Sensex to its highest close since January 2012 and the Nifty to its highest close since January 2011 as of Saturday.
Banks were among the leading gainers on Tuesday after data showed the wholesale price index for April rose 4.89 percent from a year earlier. Data on Monday showed consumer prices had also eased last month.
State Bank of India rose 0.7 percent, while Axis Bank Ltd
The RBI last cut interest rates on May 3, but disappointed investors with a more hawkish tone on future action.
Oil and Natural Gas Corp Ltd
ONGC rose 1.8 percent, while Oil India gained 1.7 percent.
Tata Motors Ltd
Shares in drugmaker Ranbaxy Laboratories Ltd
Those falls had been sparked after Ranbaxy pleaded guilty to U.S. felony charges related to drug safety and agreed to pay $500 million in civil and criminal fines, but analysts said the drug maker had already provisioned for the fines.
Among stocks that fell, Dr.Reddy's Laboratories Ltd