The BSE Sensex rallied the most in nearly two weeks on Tuesday, led by ICICI Bank, construction major Larsen & Toubro (LART.NS) and software bellwether Infosys (INFY.NS), as investors bet the RBI will soon start cutting interest rates to bolster growth.

BSE

BSE Sensex

Signs of an improvement in global risk appetite also boosted the outlook for capital inflows after foreign funds had been net sellers last year.

The 30-share BSE index rose 2.72 percent, or 421.44 points, to 15,939.36, its highest close since December 26, with all but two of its components rising. The benchmark gained as much as 2.9 percent during trade.

People are slowly realising the fact that we are at the peak of the interest rate cycle and this has triggered a rally in the rate sensitive stocks, said Kaushik Dani, fund manager at Peerless Mutual Fund.

There are chances of some sort of easing in the key rates this month.

BNP Paribas forecast the BSE index to trade in a range of 14,000-19,000 in the coming months and touch 18,500 by the end of 2012, helped by decline in inflation and interest rates and eventual recovery in some areas of infrastructure construction.

Some domestic economic drivers are obvious -- declining inflation and easing of the policy cycle are some of them, it said in a note. We expect a mild recovery in the capex cycle from 2H12 and the earnings downgrade cycle to continue in the near term, but to stop from around mid-2012.

Infosys rose nearly 2 percent to 2,864.30 rupees, its highest close since October 31. Brokerage CLSA upgraded the stock to 'outperform' from 'underperform', saying the company is best placed to capitalise on the weak rupee.

India's export-driven software services sector gets more than half their revenue from the United States and the rupee that slumped almost 16 percent in 2011 is positive for the profit margins of the companies like Infosys and rival TCS.

No. 2 lender ICICI rallied 4.2 percent, while bigger rival State Bank of India (SBI.NS) rose 4.8 percent and HDFC Bank (HDBK.NS) climbed 2.9 percent on expectations the RBI could start easing policy as soon as this month.

The RBI, which raised interest rates 13 times between early 2010 and last October to fight stubborn inflation, is likely to begin easing policy with the focus shifting to slowing growth, the governor told the BBC in an interview published on Monday without saying when this will happen.

The BSE index was among the worst performers in the world in 2011, falling 24.6 percent, with foreign portfolio investors pulling out $512 million, compared with inflows of more than $29 billion in 2010.

Traders are expecting a revival in foreign inflows after the government said on Sunday it would allow individual foreign investors to directly buy stocks from January 15. It was the latest step to liberalise the Asian economy after a year of big losses in the stock market.

The near-term momentum of the market will be determined by the earnings season starting next week, with No. 2 software services exporter Infosys reporting on January 12, said Dipen Shah, head of private client group research at Kotak Securities.

Network18 Media and Investments (NEFI.NS) and TV18 Broadcast (TVEB.NS) jumped 20 percent each, their maximum permissible limits, after the companies said a unit of Reliance Industries (RELI.NS) would fund the owners to subscribe to a rights issue of up to 27 billion rupees.

Reliance, which has been looking to diversify into newer businesses like financial services and telecoms, ended up 2.6 percent at 724.65 rupees.

Engineering and construction major Larsen & Toubro gained 5.1 percent, its strongest pace of rise since August 29, as the possibility of a rate cut boosted the outlook for investment on new infrastructure projects, dealers said.

Bajaj Auto (BAJA.NS) ended up 1.3 percent after the maker of motorcycles and three-wheeled motorised rickshaws launched a four-wheeled vehicle and said that production could involve Nissan Motor (7201.T) and Renault (RENA.PA).

The 50-share NSE index closed up 2.77 percent at 4,765.30 points. In the broader market, there were nearly five gainers for one loser on good volume of more than 521 million shares.

STOCKS THAT MOVED

* Tata Steel Ltd (TISC.NS) rose 6.1 percent to 361.85 rupees. Credit Suisse upgraded the world's No. 7 steelmaker to 'neutral' from 'underperform', citing valuation comfort at current levels.

* Religare Enterprises Ltd (RELG.NS) ended up 5.2 percent at 412.40 rupees after the financial services provider said late on Monday private equity firm Jacob Ballas Ltd would invest 2 billion rupees in unit Religare Finvest.

* OCL Iron and Steel Ltd (OCLI.NS) gained 5.6 percent to 50.15 rupees after the company said it had acquired 100 percent stake in small steelmaker BS Ispat Ltd.

MAIN TOP 3 BY VOLUME

* IFCI (IFCI.NS) on 23 million shares

* Unitech (UNTE.NS) on 19 million shares

* Tata Motors (TAMO.NS) on 16 million shares