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Banking, financial services and auto stocks led the gains on Wednesday. Top gainers on the 50-scrip Nifty index included Bajaj Finance, Bajaj Finserv, Axis Bank, State Bank of India and Eicher Motors - which closed between 5.5 per cent and 10 per cent higher.
The return of strength in the markets comes at the start of corporate earnings season and ahead of the release of key macroeconomic data.
The rupee rose as much as 23 paise against the dollar to hit an intraday high of 74.16, recovering from a record closing low registered the previous day.
Advances in other Asian peers and stronger domestic equities helped the trading sentiment, while the announcement of the first open market bond purchase for October aided bonds.
The Nifty IT - a sectoral index on the NSE - settled 1.5 per cent lower. Weakness in the rupee augurs well for exporters such as IT companies, as it boosts their profitability.
Analysts, however, expect the pressure in equity markets to continue going forward.
"There has been a considerable meltdown in the past 10-15 days and it's natural to see some bounce after that... There are rumours about NBFC space being addressed. The news about SBI buying assets may have helped," news agency Reuters cited Dhananjay Sinha, head-institutional research, Emkay Global Financial Services, as saying.
State Bank of India said on Tuesday it is stepping up its target to buy "good quality" asset portfolios from NBFCs, bringing cheer to the sector which has been beaten after defaults by Infrastructure Leasing & Financial Services. Analysts say that SBI's decision allayed some concerns about the non-banking financial sector struggling with a cash crunch.
Domestic institutional investors (DIIs) net purchased equities worth Rs 1,526 crore on Tuesday, while net sale by foreign institutional investors (FIIs) stood at Rs 1,242 crore, according to provisional data from the NSE.
IT major Tata Consultancy Services is slated to release its quarterly earnings report for the July-September period on Thursday. The government is due to release consumer inflation and industrial production data on Friday.
(With agency inputs)