* BSE index gains 1.93 pct; NSE index ends up 1.83 pct
* State-run banks rally on hopes of govt stake sale
* Market awaits central bank policy review on Tuesday
By Indulal PM
MUMBAI, June 2 Indian shares posted their biggest daily gains in three weeks on Monday as Larsen & Toubro surged after its quarterly earnings beat estimates while state-run banks rallied on hopes the government would consider selling some of its holdings and inject capital.
The gains snapped a two-day selling streak, and came in part after foreign investors purchased shares worth a net 29.77 billion rupees ($503.8 million) on Friday, which included about $364 million from the Canada Pension Plan Investment Board for increasing its stake in Kotak Mahindra Bank.
The net purchases came after foreign investors sold in five of the six sessions until Thursday.
Investors showed little reaction after data late on Friday showed India's economy posted a second straight year of sub-5 percent growth, while a business survey on Monday showed factory activity missed expectations although input prices rose at their slowest rate in over a year.
Markets are instead awaiting the Reserve Bank of India's policy review on Tuesday, with most analysts expecting the central bank to keep interest rates on hold but to ease up a bit on its tough inflation rhetoric in a conciliatory gesture to the new Narendra Modi government.
"Tomorrow will be the first policy under the Modi government, and we are not expecting any negative surprises. It's a buy-on-dips market and the undercurrent is firm," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.
"FIIs continue to buy and we don't see any immediate downward risk. There could be some minor profit-booking, which would be absorbed."
The benchmark BSE index rose 1.93 percent to end at 24,684.85, posting its biggest daily percentage gain since May 12.
The broader NSE index ended 1.83 percent higher at 7,362.50.
Lenders were among the leading gainers, with the NSE bank sub-index gaining 3.3 percent on hopes the government would take measures to privatise some its holdings in public sector lenders.
Domestic newswire Cogencis reported on Monday the government was "seriously working" on a plan to transfer its equity in public sector banks to a holding company, citing an unnamed government official.
State Bank of India surged 4.03 percent, Punjab National Bank gained 3.65 percent, and Bank of India rose 4.7 percent.
Shares of Larsen & Toubro surged 6.5 percent after its January-March net profit rose a bigger-than-expected 69 percent, helped by a steep gain in revenue from its infrastructure and heavy engineering businesses, and gains from divestment.
NMDC Ltd closed 3.6 percent higher after the miner said on Friday its January-March profit rose by 34 percent to 19.62 billion rupees ($332 million).
Shares of Cox and Kings Ltd surged as much as 13 percent to their highest since March 2012 after the company sold the camping division of subsidiary Holidaybreak Ltd to France's Homair Vacances group for 89.2 million pounds.
HDFC Bank ended 3.4 percent higher, while Hindustan Unilever closed 0.4 percent lower as changes by MSCI to its global indices became effective after the close of markets on Friday.
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FACTORS TO WATCH * Euro pressured by expectations of ECB easing, eyes recent lows * Brent climbs towards $110, China data revives demand hopes * China PMI lifts shares, commodities, euro soft ahead of ECB * Foreign institutional investor flows * For closing rates of Indian ADRs
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Politics/General Asia Macro data (Reporting by Indulal PM; Editing by Subhranshu Sahu)