Indian shares jumped 5.17 per cent on Wednesday, their biggest gain in more than 1-½ years, snapping a seven-day fall as sentiment rallied after the US Federal Reserve's aggressive interest rate cut boosted sentiment.
Traders remained wary after the surge, which only took the market back to just below Monday's close, as the risk of recession in the world's largest economy still loomed large.
"It's just a relief rally after the sharp fall, driven by the Fed rate cut," said KK Mital, a fund manager at Escorts Asset Management. "Traders should remain cautious, as the markets are likely to remain very, very volatile in the near term."
Reliance Industries, India's most valuable listed firm, and banking stocks such as State Bank of India led the rebound from a vicious sell-off, which had included intra-day falls of more than 10 per cent on both Monday and Tuesday.
The main BSE 30-share index ended up 864.10 points, at 17,594.07, posting its biggest single-day percentage gain since June 15, 2006, with all but one component gaining.
The index rose as much as 7.6 per cent during the day, but at the close was still 17 per cent below a record high hit on January 10.
"The fall in the Indian markets was mainly triggered by some external factors, and unless the global markets stabilise completely, we won't see a sustained rally," said Amitabh Chakraborty, president of equities at Religare Securities.
The US Fed cut its federal fund rates by 75 basis points to 3.5 per cent on Tuesday, a week before a scheduled rate meeting and its biggest rate cut in over two decades, to soothe fears of a US recession and help tame a global rout of equities.
Stocks climbed in Asia and Europe after the cut, but there were doubts about how far markets could recover.
"We are seeing a pull-back rally, but technical charts do not indicate that the market has completely bottomed out. So we will see some profit-taking at higher levels," said Subash Gangadharan, a technical analyst with HDFC Securities.
Credit Suisse said investors should remain "overweight" on Indian sectors such as engineering goods, construction and natural gas, as their underlying earnings growth had little to do with financial markets turmoil or the global economy.
Shares in Reliance Industries rose 8.4 per cent to 2,554.85 rupees, as investors saw value in a stock which had shed almost 26 per cent in the previous six sessions, traders said.
Bank issues were also in favour, tracking gains in financials in offshore markets in the wake of the Fed rate cut.
State Bank of India rose 7.6 per cent to 2,324.15 rupees, HDFC Bank ended up 6.6 per cent at 1,534.75 rupees, and No. 2 bank ICICI Bank added 2.3 per cent to 1,150.80 rupees. The sector index climbed 5.6 per cent.
Chakraborty at Religare Securities said large-scale withdrawals by foreigners in the past week were a concern.
Overseas funds sold more than $2 billion worth of Indian shares in the four trading days to Monday and provisional data from the National Stock Exchange showed they sold Indian shares worth 42.65 billion rupees on Tuesday.
Foreigners bought a record $17.4 billion of Indian shares ast year, a key driver of the market's surge to record highs.
In the broader market, 1,401 losers were ahead of 1,298 gainers on a volume of 402 million shares.
The 50-share NSE index ended up 6.21 per cent at 5,203.40, also settling just below its close to Monday.
Elsewhere in the region, Karachi's 100-Share index edged up 0.20 per cent at 13,787.07, and Colombo's All-Share index ended up 2.7 per cent at 2,452.39 points, its highest close since Jan. 7.
STOCKS THAT MOVED
* Reliance Energy rose 15.9 per cent to 1,989.95 rupees after the utility said it had won a railway project worth 25 billion rupees from the Delhi Metro Rail Corp, in consortium with Spain's CAF. The stock had fallen 31 per cent over the previous seven sessions.
* Bharat Heavy Electricals rose 8.1 per cent to 2,145.75 rupees. Brokerage India Infoline on Wednesday assigned a "buy" rating on the stock with a target price of 3,200 rupees due to the state-run power equipment maker's strong order pipeline.
* Sesa Goa ended 15.5 per cent higher at 3,021.80 rupees after the iron ore exporter said quarterly profit more than doubled from a year earlier.
MAIN TOP THREE BY VOLUME
* Ispat Industries on 34.6 million shares
* Reliance Natural Resources on 34.4 million shares
* Reliance Petroleum on 21.3 million shares