NEW DELHI The BSE Sensex gained 0.92 percent on Monday after two straight sessions of losses, as hopes for a solution to the euro zone debt crisis encouraged investors, and helped the market shrug off the possibility of an interest rate hike by the RBI.
The Reserve Bank of India (RBI) is widely expected to deliver one final interest rate increase at its policy review on Tuesday and then pause until the end of the fiscal year in March, a Reuters poll showed.
Battered-down stocks in India's showpiece information technology sector gained, with investors hoping that a stable global economy will boost corporate IT spending.
Market leader TCS gained 2.9 percent, while industry bellwether Infosys jumped 1.6 percent.
The benchmark 30-share BSE index closed up 153.64 points at 16,939.28, with 7 of its components in the red. The index, which rose as much as 1.9 percent earlier, is still down nearly 17.4 percent in 2011.
"Today we are mirroring Asia and Europe, we are hoping against hope that something happens in Europe," said Arun Kejriwal, strategist at research firm KRIS.
Analysts said expectations for a 25 basis point increase in interest rates were mostly factored in Indian shares, one of the worst performing major markets in the world this year.
State-run lender Union Bank of India slumped 11.4 percent after its July-September results disappointed, and non-performing assets rose.
"The first PSU (public sector undertaking) bank of (large) size which has reported results is talking of quality of assets getting affected, so the PSU banks came off quite sharply," Kejriwal said.
Bank stocks fell 0.4 percent, with top lender State Bank of India losing 2 percent.
ITC Ltd, India's top cigarette maker, which also makes consumer items and runs hotels, gained 1.5 percent to 206.95 rupees, after it posted a 21 percent jump in net profit for the September quarter.
Auto stocks, which have fallen significantly in 2011 on higher cost of vehicle loans, also rose. The ongoing festive season, considered auspicious for new purchases, is likely to boost carmakers' sales for the current quarter.
Maruti Suzuki, India's top car maker, rose 1.6 percent, while Mahindra & Mahindra, India's largest utility vehicles maker advanced almost 1 percent.
Airline stocks rose on hopes the government will approve a plan to allow foreign airlines to buy stakes in Indian carriers.
Kingfisher Airlines gained 0.44 percent, while SpiceJet rose 3.7 percent. Jet Airways, India's largest carrier by market share, rose 0.77 percent.
The broader 50-share NSE index closed 0.96 percent up at 5,098.35 points.
There were 1.3 gainers for every decliners in the broader market, where 478.7 million shares changed hands.
At 1017 GMT, the FTSEurofirst 300 index of top European shares was up 0.48 percent.
World stocks, as measured by the MSCI world equity index, rose 0.64 percent.
Some progress was made in Brussels over the weekend, with agreements near on bank recapitalisation and on how to leverage the European Union's EFSF rescue fund to try to stop bond market contagion.
STOCKS THAT MOVED
* Polaris Software rose 8.13 percent after it raised its revenue outlook for 2012 to between 20.1 billion and 20.6 billion rupees from between 19.68 billion and 20.14 billion rupees on Saturday.
* Paint maker Akzo Nobel India Ltd fell 9.36 percent after its parent Akzo Nobel NV abandoned its 2011 core profit guidance and said it would cut 500 million euros ($690 million) of costs, in a bid to offset higher raw material prices and as softening demand spread to China.
* Blue Star fell 8.5 percent after it reported a loss for July-September.
MAIN TOP 3 BY VOLUME
* Vaswani Industries Ltd on 35.8 million shares
* Shree Ashtavinayak Cine Vision on 15.6 million shares
* Tata Motors on 12.9 million shares
(Editing by Aradhana Aravindan)