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Indian shares rebounded in the final two hours of trade on Wednesday, led by a jump in public sector enterprises on the back of comfortable valuations while a drop in IT stocks after hot U.S. inflation data capped the gains.

The NSE Nifty 50 index rose 0.45% to 21,840.05, while the S&P BSE Sensex settled 0.39% higher at 71,833.17.

Both the blue-chip indexes had lost about 1% earlier in the session.

"Domestic markets staged a recovery, buoyed by renewed buying interest in banking stocks," said Vinod Nair, head of research at Geojit Financial Services, adding that improving asset quality and government's focus on fiscal prudence made state-owned banks attractive.

Barring IT and pharma, sectors that earn a significant share of revenue from the U.S., all the other 11 major sectors advanced.

Public sector banks added 3.24%, led by a 4.20% jump in India's top state-owned lender State Bank of India.

A comparison of public sector banks' valuations with historical data suggests a re-rating potential of 25-30%, said equity analysts led by Mahesh Nandurkar of Jefferies. They identified SBI, Coal India and NTPC as their top picks among state-owned companies.

Bharat Petroleum Corporation of India, ONGC and Coal India were among the top five Nifty 50 gainers.

The rise in BPCL, ONGC and Coal India also powered the energy index 2.24% higher.

On the other hand, IT and pharma shed about 1% each, after data showed inflation in the world's largest economy slowed less than expected in January, hurting market expectations of an early Federal Reserve rate cut. Asian markets were muted. [MKTS/GLOB]

Paytm fell 10% on the day, after reports said India's financial crime fighting agency has begun a probe into the company's payments bank. The stock has lost 55.05% since the Reserve Bank of India's clampdown on its payments bank business on Jan. 31.