The BSE Sensex climbed on Thursday on expectations that slowing inflation will help the RBI to start cutting interest rates, which will boost the outlook for growth that has been slowing for many months.
Investors, however, were cautious ahead of the quarterly earnings season that begins next week, with many sectors hit by high borrowing costs and sluggish consumer spending.
The main 30-share BSE index was up 0.4 percent at 15,945.98 by 10:37 a.m. (0507 GMT), with 22 of its components rising.
The benchmark, which fell nearly a quarter in 2011, rose more than 3 percent in the first two sessions of the new year before retreating on Wednesday.
Expectations of lower inflation numbers are briefly supporting sentiment ... but the momentum in the coming days will be determined by the earnings season, said Neeraj Dewan, director at Quantum Securities.
Most of the sectors except IT is expected to perform badly and the market will be in a wait-and-watch mode, he said.
Momentum indicators show inflation is slowing, and the ceiling for interest rates has been reached, Reserve Bank of India Deputy Governor Subir Gokarn said on Thursday.
The RBI, which raised interest rates 13 times between early 2010 and last October before pausing last month, is scheduled to review monetary policy on January 24.
Kaushik Basu, India's chief economic adviser, told Reuters on Wednesday the tide has turned in a long battle against inflation and the economy is set to rebound to its full-steam growth rate of around 9 percent within two years.
ONGC rose 1 percent early after the state-run explorer said it found four new potential hydrocarbon reserves in the country's west and northeast.
Energy major Reliance Industries also climbed 1 percent while State Bank of India, the country's largest lender, rose 0.9 percent.
The 50-share NSE index was up 0.3 percent at 4,764.15. In the broader market, there were two gainers for every loser on total volume of 97.6 million shares.
Elsewhere in Asia, shares eased as concerns about the ability of euro zone countries to refinance their huge public debt dampened investor risk appetite ahead of a French bond auction later in the day.
STOCKS ON THE MOVE
* Orissa Minerals Development Co rose 2 percent after it resumed development and mining operations at two of its mines in Orissa.
* Titan Industries rose 1.4 percent after the government made hallmarking compulsory for all jewellery items, which was seen boosting the company's products.
MAIN TOP 3 BY VOLUME
* Suzlon Energy (SUZL.NS) on 5.2 million shares
* DLF (DLF.NS) on 5.06 million shares
* IFCI on 4.5 million shares