MUMBAI The Sensex and Nifty posted their biggest gains in more than two years, while the rupee also rallied after the government stuck to its fiscal deficit target for the next financial year, raising hopes the Reserve Bank of India (RBI) would soon cut key policy rates.
A commitment by Finance Minister Arun Jaitley on Monday to meet the fiscal deficit target of 3.5 percent of the gross domestic product is also raising hopes it would raise confidence among foreign investors after heavy selling this year.
The Nifty and Sensex indexes rose 3.4 percent each, their strongest daily gains since September 2013. The rupee rose to as much as 67.86 per dollar, its highest since Feb. 10, from its closing level of 68.4250/68.4350 on Monday.
The RBI was forced to step in to prevent the rupee from gaining too much, traders said, in a reversal of just a week ago when the central bank was selling dollars to prevent the currency from hitting a record low of 68.85 to the dollar.
Markets also gained tracking advances in Asian markets following China's monetary easing and downbeat manufacturing and service surveys that raised hopes of additional stimulus measures.
"Markets are rallying because the budget was good - fiscal deficit commitments were adhered to and there was no tinkering on the capital gains tax structure," said Varun Khandelwal, a director at advisory services provider Bullero Capital.
"Additionally, pressures in global markets have alleviated on the back of PBoC (People's Bank of China) liquidity injections and in anticipation of dovish stances by the Fed, and the ECB."
Traders expressed hope the RBI may step in to cut the repo rate even before its next scheduled policy review on April 5 given the central bank had pinned any further easing on the government's fiscal stance at its policy review last month.
A combination of a rate cut intended to support economic growth along with the government's pledge for fiscal discipline is also raising market hopes of a reversal in some of the strong foreign outflows this year.
Foreign investors sold a net $2.2 billion from stocks and debt in February, the highest monthly outflows since October.
"The momentum we've seen in rupee is because of the fiscal deficit and a possible rate cut," said Paresh Nayar, FX and fixed-income head, First Rand Bank in Mumbai.
India's benchmark 10-year bond yield fell 2 basis points to 7.60 percent after slumping as much as 18 bps on Monday, the sharpest single-day fall since June 2015.
(Editing by Biju Dwarakanath)
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