The BSE Sensex reversed sharp early falls to end up 2.1 percent on Tuesday, as assurances from ministers and the market regulator lifted sentiment, while higher U.S. futures and a recovery in some Asian markets weighed in.
The benchmark BSE index fell 11.7 percent in September, but posted its smallest quarterly loss in 2008 to be down just 4.5 percent, compared with a drop of almost 14 percent in the June quarter and nearly 23 percent fall in the March quarter.
ICICI Bank, India's No. 2 lender, closed 8.4 percent higher on Tuesday, rebounding from a more than 2-year low, after the central bank said ICICI had sufficient liquidity to meet the needs of its depositors and that the bank and its subsidiaries abroad were well capitalised.
U.S. stock index futures rose strongly and European shares ran up gains following a recovery in some Asian markets such as Hong Kong and Seoul.
Traders were betting the U.S. Congress would eventually pass the $700 billion bailout package for its troubled financial sector defeated on Monday.
The 30-share BSE index closed 264.68 points up at 12,860.43, with 20 components ending in positive territory. It had fallen as much as 3.5 percent to its lowest in two years in early trade.
"I think it was mainly because of the strength in Asian markets, the amount of selling which was expected did not come," said I.V. Subramaniam, director at Quantum Asset Management.
Indian officials also moved to soothe jittery markets saying the widening global financial crisis would have only the marginal impact on the real economy.
"It may be assuring for some people, though we were never worried. We like Indian valuations. Some businesses may get hurt due to the credit crisis, but we feel there are many companies that will be able to manage," Subramaniam said.
The benchmark index is down about 18 percent in the financial year that began on April 1 and off about 37 percent since end-2007.
ICICI Bank rose 41.55 rupees to 534.85, recovering from the day's trough of 458 that was its lowest since June 2006. Larger rival State Bank of India gained 4.3 percent and top mortgage lender HDFC added 5.3 percent.
Investors also picked up battered down shares in fundamentally solid firms such as Bharti Airtel and Bharat Heavy Electricals, which rose more than 5 percent each, while infrastructure play Larsen & Toubro gained 4.2 percent.
"Nobody knows what's going to happen tomorrow. But as the Asian markets recovered and Dow futures are up, shorts had to be covered," said Gajendra Nagpal, CEO at Unicon Financial.
"And it is obvious that the first round of buying would come in these India plays."
Traders said some domestic funds were buying to dress up their quarterly closings.
But in the broader market, 1,326 losers were ahead of 1,283 gainers on volume of about 290 million shares.
The 50-share NSE index gained 1.85 percent to 3,921.20, having fallen as low as 3,715.05.
Elsewhere in the region, Karachi's 100-share index was little changed at 9,179.68, but Colombo's All-share index lost 1.98 percent to 2,142.26.
STOCKS THAT MOVED
* State-run oil refiners Indian Oil Corp, Hindustan Petroleum Corp Ltd, and Bharat Petroleum Corp Ltd rose more than 5 percent each on hopes of a lower subsidy burden after global crude prices plunged more than 10 percent on Monday.
TOP THREE BY VOLUME
* Reliance Natural Resources on 23.2 million shares
* IFCI Ltd on 12.7 million shares
* Suzlon Energy on 8.9 million shares
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