Close: Markets rally 3% on global optimism

Major gainers spanned sectors from lender ICICI Bank and energy giant Reliance Industries to engineering and construction firm Larsen & Toubro.

Diversified cigarette maker ITC gained 5.2% to Rs238.95, and government-run State Bank of India climbed 5.7% to Rs1,799.05.

Finance minister Pranab Mukherjee said on Wednesday India proposes to reform its archaic tax laws, phase out exemptions, simplify rules on corporate mergers and help improve compliance.

The US Fed made its clearest statement to date on Wednesday that it sees the recession nearing an end, and that shattered financial markets are healing.

“The market is basically following whatever cues it is getting. Overseas markets are good and the Direct Tax Code has some very reasonable proposals," Hitesh Agrawal, head of research at Angel Broking, said.

The government would try to bring in a bill in the winter session of parliament, expected to start in November, with the proposed changes in tax laws. The bill has to be debated in parliament and get approved to become a law, which means it could be implemented from 2011.

“This is first time there has been a proposal for some aggressive tax reforms since the 1960s. The market simply loves it even though it may all come into effect only much later," said Amitabh Chakraborty, president of equities at Religare Capital Markets.

The 30-share BSE index .BSESN ended up 3.32%, or 498.33 points, at 15,518.49 - its best close since 5 August, with all stocks advancing. It was the benchmark’s best one-day percentage gain in more than 3-½ weeks. The 50-share NSE index .NSEI ended up 3.3% at 4,605.

Some analysts warned just bullish sentiment may not be able to spur the market significantly higher, as worries that poor monsoon rains would dent economic growth and concerns about rich valuations still persist.

The monsoon rains were 56% below normal over the past week, government data showed on Thursday, disappointing farmers for a third consecutive week as consumers felt the pinch of rapidly rising food prices.

With just over 40% of agricultural land irrigated, farm output is heavily reliant on rains and the shortfall could potentially hurt rural demand, which accounts for more than half of India’s domestic consumption.

The wholesale price index fell in the year to 1 August for the ninth week in a row, but there were signs prices could rise faster in the coming months due to the weak monsoon and growing manufacturing demand.

“I am still skeptical about the rise in the market due to the monsoon situation. The rally may be just a bounce back after the recent weakness we have seen," Angel Broking’s Agrawal said.

The BSE index had slid 3.25% last week on the rain concerns after jumping 16% over the previous three weeks, buoyed by a worldwide equities rally on strong corporate earnings and improving signs of a global economic recovery.

Despite concerns about rich valuations after the benchmark leapt 93 percent from a 2009 low in early March and 61% this year, a rush of liquidity pouring into equity markets could support stocks in the near term as investors look to buy on dips, analysts said.

“Global liquidity is intact and it is strong. Overall momentum has also improved," Religare’s Chakraborty said.

“Emerging markets like India are looking attractive again." ICICI Bank rose 6.5% to Rs756.95, while Larsen advanced 5.2% to Rs1,495.80.

Reliance Industries, India’s largest listed firm with the most weight in the main index, added 1.6% to Rs2,023.45.

In the broader market, gainers led losers by more than 4 to 1 on relatively heavy volume of 479.9 million shares.

Asian shares were higher, with Japan’s Nikkei rising 0.8%, while MSCI’s measure of other Asian markets was up 2.3%.

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