The automotive shares gained on Monday after the country's finance minister proposed cutting the factory gate duty on vehicles, a move that could reduce vehicle prices and boost sales.
Shares in Mahindra and Mahindra Ltd, India's largest utility vehicle maker, rose as much as 1.8%, while shares of Hero MotoCorp Ltd, the country's largest two-wheeled vehicle maker, jumped as high as 4%.
Finance minister P Chidambaram, in his interim budget, proposed reducing the excise duty on small cars, two-wheelers and commercial vehicles to 8%from 12%.
The duty on sport-utility vehicles would fall to 24%from 30%, while for large and medium-sized cars it would drop to 24%and 20%, respectively.
Chidambaram presented the interim budget for the fiscal year 2014/15 to cover expenditures until a new government is formed after elections due by May. His proposals are expected to be approved by the parliament within the next few sessions.
"This has been an industry, which has been struggling, so from that point of view it's a good signal and hopefully we will get some bit of positive sentiment back," said VS Parthasarathy, chief financial officer at Mahindra.
"This industry has been on negative growth trend for some months, so hope that this helps it turn around the corner," he added.
Car sales fell 7.6%in January, the fourth consecutive month of declines, according to figures released by the Society of Indian Automobile Manufacturers (SIAM) as consumers kept a tight lid on spending, hurt by high interest rates and fuel costs in a slowing economy.
Utility vehicles were a bright spot in the auto market a year ago, but an increase in factory gate duties and rising prices of diesel, which is commonly used to power such vehicles, has hit their sales as well.
"It may not be possible for automakers to immediately pass on the concession to buyers, but given that vehicle sales have been on a declining trend, I do expect automakers will do their best to pass on some of the benefit," said Anil Sharma, an analyst with IHS Automotive.