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BENGALURU -Indian shares closed higher on Thursday, after the central bank held its key lending rate steady as expected but surprised markets by leaving the deposit rate unchanged, and as it stuck to its accommodative policy stance to aid the economic recovery.

Some economists had predicted a hike in the reverse repo rate to re-align it with short-term money market rates.

"The MPC decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy," Reserve Bank of India (RBI) Governor Shaktikanta Das said in his policy address.

The RBI has held the key repo rate at record lows since May 2020 and reiterated time and again that it will keep its stance accommodative until economic recovery is firmly entrenched.

"The RBI has provided the market with a very dovish policy –more so than expected by the market," said Indranil Pan, chief economist, YES BANK.

"While the RBI contends that the growth momentum remains positive, the stance however indicates that it is willing to wait longer to see the growth becoming durable and sustainable."

The NSE Nifty 50 index ended up 0.81% at 17,605.85, while the S&P BSE Sensex rose 0.79% to 58,926.03.

India's 10-year benchmark bond yield fell 7 basis points to 6.731, while the rupee weakened just slightly to 74.93 per dollar.

Both the Nifty and Sensex have seen sell-offs this year after rising more than 20% in 2021, as global central banks gear up to tackle high inflation and foreign investors exit emerging markets amid expectations for higher interest rates.

Rate-sensitive financial stocks edged higher after the policy announcement. The Nifty Banking index, which had gained 8% this year by Wednesday's close, rose 1%.