Indian stocks surged the most in Asia, led by the biggest rally in lenders since May 2009, after central bank Governor Raghuram Rajan outlined plans to bolster the financial industry and stabilize the rupee.

HDFC Bank Ltd., India’s largest lender by market value, surged 6.7 percent and paced the biggest rally in the S&P BSE India Bankex in four years. Engineering company Larsen & Toubro Ltd. climbed the most in more than two months. Tata Motors Ltd., owner of Jaguar Land Rover, rose to seven-month high.

The S&P BSE Sensex jumped 2 percent to 18,930.45 at 10:35 a.m. in Mumbai. Reserve Bank of India Governor Rajan announced plans yesterday to make it easier for banks to open branches and lend to non-state sectors of the economy, steps that JPMorgan Chase & Co. analysts say will have a “major long-term impact” on bank profits. The RBI will also provide swaps for banks’ foreign-currency deposits that Bank of America Merrill Lynch estimates will boost India’s reserves by $10 billion.

“The moves by the new governor are very bold,” Manish Sonthalia, a Mumbai-based money manager at Motilal Oswal Asset Management Co., said in a phone interview today. “He has signaled that he will take quick actions.”

Rajan, the former International Monetary Fund chief economist, is contending with a currency that has plunged 17 percent this year and consumer prices increases of almost 10 percent. India’s economy grew 4.4 percent in the quarter ended June, the weakest pace since 2009. The rupee strengthened 1.2 percent to 66.3150 per dollar.

Loan Recovery

HDFC Bank gained 6.3 percent to 599.75 rupees. ICICI Bank Ltd. soared 7.8 percent to 881.2 rupees. Yes Bank Ltd. climbed 14 percent, paring this year’s slump to 42 percent. The S&P BSE Bankex surged 6.9 percent, narrowing the year-to-date loss to 25 percent. Larsen increased 3.6 percent to 724.15 rupees. Tata Motors climbed 3 percent to 320.95 rupees.

There’s a need to cut the requirement for banks to invest in government debt and ensure lending to productive sectors of the economy, Rajan said yesterday. The RBI will look at ways to improve the recovery mechanism for bad loans and propose a database for large loans across banks, he said.

Bad debts rose to 3.92 percent of total lending at the end of June, the highest level in at least five years, from 3.4 percent at the end of March, according to central bank data.

“Rising bad loans are the biggest concern for investors, and if Rajan can tackle that then it will be the biggest boost to lenders’ profits and sentiment,” Motilal’s Sonthalia said.

The Sensex declined 18 percent in dollar terms this year. The gauge is valued at 13.5 times projected 12-month earnings, compared with 14.3 times on July 23, and has lost 2.3 percent this year in local currency terms.

The CNX Nifty on the National Stock Exchange gained 2.3 percent to 5,572.75. India VIX, which measures the cost of protection against losses in the Nifty, fell 7.6 percent.

International investors sold a net $108.6 million of local shares on Sept. 3, data from the market regulator show. That pared this year’s inflow to $11.4 billion.

(Source: Bloomberg)