MUMBAI (Reuters) - A rally in banking shares powered the BSE Sensex to its highest close in almost three weeks on Wednesday on speculation the Reserve Bank of India (RBI) may still deliver a surprise rate cut this week after a key sub-measure of inflation cooled.
Although headline inflation, released on Wednesday, picked up for the first time in five years, non-food manufactured inflation, which the RBI uses to gauge demand-driven price pressures, slowed to a 14-month low.
The split picture on inflation revived talk the central bank could still deliver a cut in interest rates on Thursday, after already surprising markets with a 75-basis points cut in the cash reserve ratio for banks last week.
Shares in banks have gained since the CRR cut, which was intended to ease the pressure on liquidity.
But not all analysts expect another move from the RBI.
"Policy is being looked upon keenly as to whether it will stoke up investment cycle, but my belief is that after the CRR cut, the government will wait for a rate cut," said Nitin Raheja, director of investment firm AQF Partners.
The main 30-share BSE index gained 0.6 percent to 17,919.30 points, marking a fourth consecutive session of gains and its highest close since February 24.
The 50-share index rose 0.6 percent to 5,463.90, the highest close since February 23.
Also helping were expectations the federal budget on Friday could contain beneficial measures to the sector, including making provisions on non-performing loans tax-deductible, according to an analyst at a major foreign brokerage.
Derivatives data showed fresh long positions were built up on several banks on Wednesday.
Among other gainers, Tata Motors (TAMO.NS) rose 2.5 percent after unit Jaguar Land Rover said it was boosting U.K. production of two models, seen as indicating confidence about sales in the European markets.
But among decliners, railway-related shares dropped as traders cited disappointment about a lack of more specifics in the railway budget released on Wednesday, which featured the first passenger fare hike in eight years.
Kingfisher Airlines (KING.NS) shares dropped 3.6 percent after its announcement of scaling back overseas flights was followed by an accusation from the country's aviation regulator that it was reneging on a recovery plan.
British Airways separately said it had suspended a code-sharing pact with the cash-strapped Indian airline.
Reporting by Abhishek Vishnoi and Manoj Dharra; Writing by Rafael Nam; Editing by Rajesh Pandathil