* Main index climbs to highest close in two months * Reliance jumps, rising oil improves refining margin outlook * Banks, cement, autos rally on rate cuts * Satyam tumbles on business outlook concern (Updates to close) By Naryanan Somasundaram MUMBAI, Jan 5 (Reuters) - Indian shares rallied 3.2 percent on Monday to their highest close in two months as rate cuts and an economic package to boost faltering economic growth drove financials, cement and autos higher. Sentiment was also lifted after markets across the world climbed as low prices and hopes for a global economic recovery later this year prompted a shift into riskier assets. [ID:nL567627] After markets had closed on Friday, the central bank slashed short-term interest rates by 1 percentage point and the government unveiled plans to increase foreign inflow of funds [ID:nBOM292196] "We believe the measures to enhance credit availability and the measures to boost infrastructure are relatively stronger measures," analyst Manishi Raychaudhuri at BNP Paribas said in a report. Energy group Reliance Industries (RELI.BO) jumped 6.4 percent to 1,365.75 rupees, its biggest single-day percentage rise in nearly three months, after oil prices climbed 3 percent amid rising tension in the Middle East. Higher oil prices would lift Reliance's refining margins and the economy boosting measures by the government could raise demand for fuel and petrochemicals, traders said. [ID:nSP343684] Construction, cement, financials and auto firms rose on hopes the rate cut and federal government moves to draw more funds into the country will boost demand. The 30-share benchmark index .BSESN rose 3.19 percent, or 317.38 points, to 10,275.60, its highest close since Nov. 10. Twenty-three of its components rose. The benchmark had risen 6.7 percent last week in anticipation of the rate cuts. "We believe that the fiscal measures ... and increasing public spending will likely be most effective in the current environment of risk aversion, where the private sector leveraging is unlikely to pick up," Morgan Stanley said. No. 2 lender ICICI Bank (ICBK.BO) rose 6 percent to 499.65 rupees, its highest close in more than three months, while top lender State Bank of India (SBI.BO) gained 2.4 percent to 1,361.20 as investors expected banks to gain from higher bond prices as interest rates soften. "While we welcome these counter-cyclical measures as a timely boost to confidence, we do not think that they will materially change the growth outlook," Goldman Sachs said in a report. It continued to expect Indian economic growth to slow to 6.7 percent in FY09 and 5.8 percent in FY10. Jayesh Shroff, a fund manager at SBI Mutual Funds, said shares prices had factored in dismal quarterly earnings due this month after the BSE index slumped more than half in 2008 in its worst performance ever. Still, there could be negative surprises, he said. Earnings of the top-30 BSE index companies are expected to drop 0.2 percent on year, compared with a growth of 5.5 percent in the September quarter, Morgan Stanley said in a research note. It would be the first year-on-year dip in quarterly earnings for the benchmark index since 1999, it said. The earnings parade will be kicked off by private sector lender Axis Bank (AXBK.BO) on Friday, followed by IT bellwether Infosys Technologies (INFY.BO) on Jan. 13. Embattled Satyam Computer Services (SATY.BO) fell 6 percent to 166.90 rupees on concerns that corporate governance issues could hit new business. [ID:nBOM370490] Traders said wary investors were also paring positions after the stock rose more than 50 percent from its lows on Dec. 24. In the broader market 1,686 gainers led 866 losers on heavy volume of 391 million shares. The 50-share NSE index was up 2.5 percent at 3,121.45. STOCKS THAT MOVED * Telecoms firm Reliance Communications (RLCM.BO) climbed 5.4 percent to 263.75 rupees after it launched at GSM-based mobile phone services in the lucrative Mumbai market. * Auto makers Tata Motors (TAMO.BO), Ashok Leyland (ASOK.BO) and Mahindra & Mahindra (MAHM.BO) rose between 1 and 3.2 percent on hopes the rate cuts would revive demand. * Shares in Tata Steel (TISC.BO), Hindalco Industries (HALC.BO) and Sterlite Industries India (STRL.BO) rose between 4 percent and 9.8 percent after the economy boosting measures. * Nucleus Software (NSEL.BO) rose 2.5 percent to 52.30 rupees after the firm said it had won a contract from UAE-based National Bank of Umm Al Qaiwain. * Cement firms such as ACC (ACC.BO) and Ambuja (ABUJ.BO) gained between 1.5 percent and 2.5 percent on hopes for better demand after the stimulus package. MAIN TOP 3 BY VOLUME * Unitech (UNTE.BO) on 31.8 million shares * IFCI (IFCI.BO) on 25.1 million shares * Reliance Natural Resources (RENR.BO) on 18.8 million shares FACTORS TO WATCH * Indian rupee trims rise as large state bank buys dlrs [INR/] * Indian bonds yields off low on profit booking [IN/] * FOREX-Dollar hits 3-week high vs yen as stocks gain [FRX/] * UPDATE 2-Oil above $46 on Gaza, Russia gas row [O/R] * GLOBAL MARKETS-Investors boost stocks, dollar climbs [MKTS/GLOB] * US STOCKS-Wall Street starts new year with strong rally [.N] * For closing rates of Indian ADRs INADR (Editing by Ranjit Gangadharan)

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