Indian shares rally, post biggest daily gains of 2014
* BSE index gains 1.81 pct, NSE up 1.64 pct
* Shares mark biggest single day gains of the year
* BSE IT index up nearly 3 pct
By Indulal PM
MUMBAI, Jan 13 (Reuters) - Indian shares rose nearly 2 percent to post their biggest daily gains this year on expectations the central bank will hold interest rates at the current levels and the U.S. Federal Reserve will keep its monetary policy loose for longer.
A second consecutive month of output contraction is likely to weigh when the central bank meets for its rate review on Jan. 28.
Data later in the day is expected to show consumer prices eased in December, helped by waning food prices, solidifying the case for the Reserve Bank of India to keep interest rates on hold after data on Friday showed industrial output unexpectedly contracted in November.
"The near-term outlook for the market is firm. FIIs are continuously buying and supporting the rally. However, at the higher-levels, there could be some profit-taking. But the undercurrent remains positive," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.
"Markets expect RBI may keep rates on hold because of slow growth, which would be another positive in the near term," he said.
Foreign investors bought shares worth 681.6 million rupees ($11 million) on Friday, provisional exchange data showed.
Software services exporters lead gains with the BSE IT Index up 2.92 percent after Infosys reported better-than-expected quarterly results on Friday. .
Banking stocks rose sharply, with State Bank of India gaining more than 2 percent and ICICI Bank up 3 percent. The bank index gained 2.04 percent.
The benchmark index closed 1.81 percent higher at 21,134.21, marking its biggest single-day gain since Nov. 25.
The broader NSE index ended up 1.64 percent at 6,272.75, its biggest single-day gain since Dec. 20.
Tata Motors rose 2.5 percent after key unit Jaguar Land Rover sold a record volume of vehicles last year. .
Shares of oil and gas companies including Reliance Industries and Oil and Natural Gas Corp gained after the government officially notified a decision taken last year to change the pricing formula for domestic natural gas from April 1, removing the uncertainty on what effectively constitutes a price hike..
Shares in Ranbaxy Laboratories were sharply down, ending 5.4 percent lower, after the Indian drug maker said the U.S. Food and Drug Administration (FDA) has raised concerns about the manufacturing practices at one of its facilities. .
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FACTORS TO WATCH * Dollar tumbles vs yen as U.S. jobs data weighs * Oil falls below $107 on Iran nuclear deal * Stocks rise, dollar falls as Fed rate path reassessed
* Foreign institutional investor flows * For closing rates of Indian ADRs
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