MUMBAI (Reuters) - The BSE Sensex rallied more than 1 percent on Tuesday as investors scooped up beaten-down heavyweights ahead of the quarterly earnings parade on hopes the worst was behind them.
The rise for a third consecutive session if sustained till the close will be the longest gaining streak in nearly a month.
Hopes of an easing in global macroeconomic worries with European leaders finally taking action to protect the continent's banks has also encouraged risk-taking in the Indian market that is down more than 18 percent this year.
Energy major Reliance Industries led the gains, rising as much as 1.5 percent to 841.40 rupees, its highest in nearly three weeks, on bargain hunting by institutional investors.
The stock, which has the heaviest weight on the main index, is still down more than 21 percent this year.
Telecoms shares such as Bharti Airtel, Reliance Communications and Idea Cellular firmed after a new draft policy was seen broadly positive for the once-booming sector that has struggled in recent years due to ferocious competition and a massive graft scandal.
The main 30-share BSE index was up 0.8 percent at 16,690.23 points by 11:17 a.m. (0547 GMT), after having risen as much as 1.3 percent early. All but six of the index components were in the positive territory.
"Valuations are comfortable and if the top companies are able to meet the earnings estimates then this rally can be sustained," said Dipen Shah, head of research for private client group at Kotak Securities.
He said investor confidence had improved in the last few days after the attempts to solve the European crisis.
Citigroup said in a research note Indian equity markets offered upsides in the near term due to reasonable valuations and likely peaking of the interest rate and inflation cycle in Asia's third-largest economy.
"If India's problems are cyclical/domestic, then a lot is in expectations/prices, and any global easing could see India lead," the U.S. bank said in the report dated Monday, adding it was "optimistic" on the market.
Indian market valuations are now more reasonable trading at 12.7 times one-year forward P/E, about 15 to 20 percent below average, Citigroup said, adding the market's relative premium to overseas peers has also moderated.
The BSE index's 30-day relative strength index stood at 48 on Tuesday. A reading below 30 indicates stocks are technically oversold, while a value above 70 indicates they are overbought.
The market has been battered in recent months by surging inflation and interest rates, concerns about slowing domestic economic and earnings growth, as well as worries about the health of the global economy.
Shares of mobile operators such as leader Bharti rose 3.9 percent to 377.80 rupees, a day after the government unveiled a draft telecom policy proposed to let carriers share airwaves and allow for consolidation.
Macquarie said the policy was a step in the right direction and said the brokerage was now more confident that the general regulatory regime would promote clarity, growth and consolidation.
It said the exit option for operators mentioned in the policy would promote consolidation and improve pricing power.
Reliance Communications, the No.2 mobile operator, was trading 3.2 percent higher at 76.40 rupees, while fourth-ranked Idea rose 3.8 percent to 95.60 rupees.
Shares in financials including HDFC Bank and ICICI Bank rose 1.7 percent and 1.6 percent, respectively, on hopes that the ongoing festive season would boost demand for credit, dealers said.
Leading car maker Maruti Suzuki fell as much as 0.7 percent on continued labour unrest at its Manesar plant that has badly hit production of cars and is expected to hurt profitability..
Striking employees have seized control of a factory hit by weeks of labour unrest, the company said on Monday, as a stand-off that has cost the firm over $150 million descended into violence.
Infosys was down 1.9 percent at 2,540 rupees, a day before its quarterly earnings and guidance.
The No. 2 software exporter is forecast to report a 9 percent rise in net profit but there are concerns about its outlook on a slowing U.S. economy and the debt crisis in Europe.
The 50-share NSE index gained 0.8 percent to 5,021.25 points. In the broader market, gainers were ahead of losers in the ratio of 3.7:1 on total volume of about 223 million shares.
Asia stocks on Tuesday joined a global market rally after a pledge from German and French leaders to come up with a plan by the end of the month to tackle Greece's confidence-sapping debt woes and recapitalise European banks.
Regional sentiment was also bolstered by China's move to support its stock market by buying shares of major banks in a sign of government support for the country's languishing stock market.
STOCKS ON THE MOVE
* Suzlon Energy rose 1.1 percent to 37.80 rupees after the wind turbine maker said it had won a repeat order in Sri Lanka for 21 MW.
* Strides Arcolab was trading 1.6 percent higher at 348.50 rupees after the drugmaker said it received U.S. approval for cladribine injection.
MAIN TOP 3 BY VOLUME
* Tata Motors on 6.8 million shares
* Hindalco on 5.1 million shares
* Unitech on 4.9 million shares
(Reporting by Sumeet Chatterjee; Editing by Ranjit Gangadharan)