S.Africa's rand firms to 8 mth high, stocks edge up

* Rand at 8-mth high vs dlr on possible MTN/Bharti deal

* Stocks edge up as businesses look to expected rate cut

* Government bonds weaker

JOHANNESBURG, May 27 (Reuters) - South Africa's rand firmed sharply to an 8-month against the dollar on Wednesday as investors favoured local assets on a proposed deal between telecoms operator MTN and its Indian counterpart Bharti Airtel.

MTN (MTNJ.J) and Bharti (BRTI.BO) have restarted talks aimed at creating the world's third-biggest cell phone group with more than 200 million subscribers and combined revenue of $20 billion. [ID:nLP34850]

The JSE Top-40 index of blue-chip stocks inched 0.25 percent higher to 20,370.40 points while the All-share index pushed 0.36 percent higher to 22,521.68 points.

At 1547 GMT, the rand ZAR=D3 was trading at 8.12 against the dollar, about 2.1 percent firmer than its previous New York close of 8.30. It touched 8.09 earlier its strongest level since Sept 29, according to Reuters data.

"Volumes are very light and we are seeing some continued equity buying by foreign investors," said Peter Attard Montalto, emerging market economist at Nomura International.

"We think the market is getting over excited by the prospect of MTN/Bharti flows -- as ever in such cases the market over hedges such flows by 10 times or so," he said, adding the rand had also broken through a key technical level of 8.20/dlr.

The rand's reaction to the release of inflation data earlier in the day was rather muted.

Annual headline CPI for April was above forecasts at 8.4 percent, but the central bank is still expected to cut rates sharply on Thursday as the economy is in its first recession in 17 years. [ID:nLR625797]

Local stocks firmed as financials and retailers raced higher on hopes for an interest rate cut but MTN slid after several shareholders said they would reject a tie-up with India's Bharti under the proposed terms.

"Commodities and financials are driving the market," Barend Saayman, a trader at Thebe Securities said. "I think financials are up on anticipation of a rate cut tomorrow."

Investec (INLJ.J) was up 6.35 percent at 44.35 rand, FirstRand (FSRJ.J) gained 2.45 percent to 13.80 rand and Old Mutual (OMLJ.J) muscled 4 percent higher to 9.58 rand.

Retailers also gained ground on hopes lower interest rates would boost consumer spending. Supermarket group Shoprite (SHPJ.J) climbed 3.41 percent to 54.60 rand and clothing retailer Truworths (TRUJ.J) rose 1.23 percent to 36.09 rand.