Indian shares rose more than 1 percent on Tuesday after the country's central bank kept key rates unchanged but said it would remain "accommodative" as it keeps watch on inflation after it climbed unexpectedly in April.
India's central bank kept its policy interest rate unchanged at a five-year low of 6.50 percent, while cautiously signalling it could cut rates later this year if monsoon rains, and other factors, dampen upward pressure on food prices.
Analysts said the RBI would likely be open to at least one more 25 basis point rate cut this year after easing the repo rate by 150 bps since January 2015. "Going by the track record of the RBI, they would perhaps wait for the clarity on monsoons," said Ravi Gopalakrishnan, head of equities at Canara Robeco Mutual Fund.
"Post-monsoon, we expect 25 basis points cut and by the end of the year another 25 basis points."
Apart from needing a good monsoon, Rajan's statement said inflation risks could also be offset by astute management of stocks by the government, and by companies increasing supply capacity.
Consumer price inflation rose at a faster-than-expected pace, to 5.39 percent in April, from 4.83 percent in March.
The broader Nifty .NSEI touched its highest since Oct. 26, trading up 0.97 percent at 8,280.9 as of 0903 GMT, while the benchmark Sensex .BSESN was up 0.95 percent at 27,032.15.
Both the indexes ended lower on Monday.
ICICI Bank Ltd (ICBK.NS) was the among the top percentage gainers on the NSE index, touching a 6-week high on a fund-raising plan.
Dhanlaxmi Bank Ltd (DNBK.NS) rose as much as 12.4 percent, its highest since Jan. 11, after The Economic Times reported the lender may become a takeover target, citing two unidentified bankers familiar with the developments.