MUMBAI: Indian shares rose for a second session in a row on Monday, as banking stocks rallied on expectations the cash crunch that had constrained the sector would ease in the new fiscal year thanks to government spending and a more vigilant central bank.
Sentiment was supported by limited foreign selling of Indian stocks, despite fears last week about taxation for overseas investors, while global risk sentiment improved after China's manufacturing index rose to an 11-month high.
The gains in the first day of the quarter come after a tough March, marked by disappointment over the central bank's decision not to cut interest rates and by higher-than-expected borrowing plans for fiscal 2012/13 announced by the government.
Investors are more optimistic in April, however, on hopes the Reserve Bank of India will deliver a rate cut at its April 17 meeting, while government spending, starting this week, could help ease a credit crunch in the banking sector.
"With government spending kicking in, I think liquidity scenario should ease off in the second half," said Sandip Sabharwal, CEO of portfolio management at Prabhudas Lilladher.
"Rate cut is a distinct possibility on April 17," he added.
The main 30-share BSE index rose 0.42 percent to 17,478.15 points, while the 50-share NSE index also added 0.42 percent, ending at 5,317.90 points
Banking shares had suffered in March from pronounced liquidity shortages, tied in part to end-of-year tax outflows and delayed government spending, prompting the RBI to step in with surprise bond purchase on Friday.
However, the start of a new year usually marks renewed spending by the government, helping inject money into India's financial systems.
State-run banks were additionally boosted after they sold shares to the government at above-market prices, as part of previously announced capital injection plans.
State Bank of India rose 1.6 percent after saying on Friday it had approved the issuance and allotment to the government of 36 million shares at a premium.
Among private lenders, HDFC bank rose 1.64 percent.
Broader sentiment also improved after overseas investors sold only a net 1 billion rupees ($19.7 million) last week, according to provisional exchange data, despite fears the government was considering targeting the tax liability of foreign institutional investors.
Foreign investors have bought a net of about $9 billion in stocks so far in 2012, despite growing economic worries that have most recently included a balance of payments that turned negative in the three months through December.
Also on Monday, Tata Motors rose 0.56 percent after reporting sales in March rose 20 percent from a year ago, as consumers pushed forward their purchases ahead of the 2012/13 federal budget, which, as expected, raised duties on cars.
Titan Industries surged 6.2 percent, after earlier hitting a record of 265 rupees, on a Press Trust of India report that the a unit of the Commerce Ministry will allow the company to import gold directly from overseas market.
However, among decliners, Reliance Industries fell 1.34 percent due to fears falling refining margins and reduced output from its KG-D6 gas blocks would hit fiscal Q4 earnings.
Bank of America-Merrill Lynch warned Jan-March net profit for Reliance could drop 20 percent year-on-year to 42.9 billion rupees, in a report dated on Monday, maintaining its "neutral" rating on the stock.