BSE Sensex rallies to 4-month high; banks gain

MUMBAI (Reuters) - The BSE Sensex rallied to its highest close since mid-March led by gains in private sector banks such as ICICI Bank on hopes improving asset quality would lead to better-than-expected earnings in the upcoming reporting season.

Sentiment was also boosted by data showing foreign institutional investors (FIIs) remained buyers of Indian stocks this month, helping domestic indexes rebound after two previous sessions of mild falls.

Gains in European stocks on hopes that Germany's constitutional court would approve the euro zone's new bailout funds also helped by improving the global risk environment.

The gains on Tuesday outperformed most Asian indexes, though analysts have warned they expect muted earnings growth in the April-June quarter, which may lead to a correction, particularly if the guidances provided fails to inspire.

"We are expecting flat earnings this quarter. It will not be even double digit growth yoy," said Sudip Bandyopadhyay, CEO of Destimoney Securities Pvt.

"I think most of the sectors would be under pressure due to rising interest cost and rupee depreciation," he added. "There is nothing positive that is coming out on economic front even the monsoons are bad so far."

The 30-share BSE Sensex rose 1.3 percent to 17,618.35 points, the highest close since March 15, more than offsetting the 0.8 percent fall over the previous two sessions.

The 50-share Nifty gained 1.33 percent to 5345.35 points.

Investors were encouraged after provisional exchange data showed FIIs were net buyers of 2.5 billion rupees in Indian shares on Monday, for a preliminary total of 58.2 billion rupees for the month.

Those purchases come despite recent concerns about lower-than-expected rainfalls during the monsoon season, which could depress rural consumption and lead to higher food prices given the impact on agricultural output.

Deutsche Bank said last week total revenue would grow by 16.4 percent in the April-June quarter from a year earlier, below 20 percent for the second quarter in a row, due to pressures from a slowing economy.

The bank expects after-tax profit growth for the BSE members to be curtailed at 9.6 percent.

Still, investors are seeing pockets of winners. Private sector lenders were among the top gainers on Tuesday on hopes that asset quality would improve, allowing the sector to boost better-than-expected earnings.

ICICI Bank (ICBK.NS) rose 1.4 percent to 942.90 rupees after

Bank of America-Merrill Lynch raised its price objective to 1,200 rupees saying asset quality may be "much better than expected" and could lead to a "re-rating of the stock" after meeting the CEO of India's biggest private lender.

Among other private lenders, Axis Bank (AXBK.NS) rose 3.8 percent.

Mortgage lender HDFC (HDFC.NS) shares rose 0.9 percent ahead of its earnings results on Wednesday.

Bargain-hunting in recent under-performers also boosted some blue chips. Auto makers gained even after an industry body slightly lowered its forecast for the current fiscal year ending in March, as traders said a weaker outlook has been factored in to some extent.

Tata Motors (TAMO.NS) rose 2.4 percent. Shares in India's second biggest auto maker have under-performed the broader indexes since the start of May.

SKS Microfinance (SKSM.NS) rose 1.61 percent, gaining for a fifth consecutive session for a combined total of 39 percent on speculation the Reserve Bank of India would ease some regulations for the sector, potentially on loan provisions.

Among other gainers, OnMobile Global (ONMO.NS) surged 8.9 percent after the mobile content provider said CEO Arvind Rao has resigned after a review of corporate governance procedures unidentified "weaknesses in some processes", raising hopes the company was looking to resolve any potential problems.

(Additional reporting by Abhishek Vishnoi)