Indian stocks climbed to the highest in 10 weeks, with the benchmark index gaining the most in Asia, as the government moved to soothe foreign investors\' concerns over tax rules and Morgan Stanley upgraded the nation\'s shares. ITC Ltd, the nation\'s biggest tobacco company, climbed to a record. ICICI Bank Ltd, the third-biggest lender by market value, gained for a third day. The BSE India Sensitive Index, or Sensex, rose 2.4 per cent to 17,401.46, according to preliminary closing prices in Mumbai, the highest since April 19. India said yesterday it plans to apply anti-tax avoidance rules from April 1, 2013, quashing concerns the norms would be used retrospectively, a day after Prime Minister Manmohan Singh took charge of the finance ministry. Overseas funds were net sellers of Indian stocks in April and May on concern the rules would apply to their local holdings. Morgan Stanley upgraded the country\'s equities to equal weight, after maintaining an underweight rating since the first quarter of 2011, saying the market is \"now close to trough valuations.\" \"The equity valuation is not just cheap to history but exceptionally cheap to other emerging markets,\" Jonathan Garner, Hong Kong-based chief strategist at Morgan Stanley, said in a Bloomberg UTV interview today. \"We felt that India had a period of significant underperformance during the period we were underweight and we didn\'t plan to remain underweight any longer.\" Investors Exempt The Central Board of Direct Taxes proposed exempting foreign institutional investors who refrain from using tax shelters such as Mauritius to invest in India from the new rules, according to an e-mailed statement yesterday. Singh on June 27 called upon finance ministry officials to unleash \"the animal spirit\" to revive an economy that grew at the weakest pace in nine years in the first quarter. The Sensex has gained 13 per cent this year and trades at 13.7 times estimated earnings. Valuations sank to a three-year low of 12.4 times on May 23. The MSCI Emerging Markets Index trades at 10.1 times. \"We would definitely encourage investors to look again at India,\" Garner said. \"Given the global news flows we have seen recently and the decline in the oil price, the risk-reward spectrum is starting to stack up a little more favorably.\" Stocks also gained as Indian Oil Corp, the nation\'s biggest refiner, cut petrol prices for the second time this month after crude futures declined. The price was reduced by 2.46 rupees (4 cents) to 3.22 rupees a litre starting today, depending on individual state taxes, Indian Oil said in an emailed statement. A 24 per cent decline in the price of Brent crude, the benchmark used by India, in the past three months has come as a relief to Singh\'s government as he seeks to narrow a fiscal deficit and boost growth, amid a decline in the rupee to a record low that has raised import costs. India buys about 80 per cent of its oil overseas. State-run refiners raised gasoline prices to a record last month, triggering protests across the country by opposition parties and Singh\'s allies. \"There is a sense of urgency that has crept in and the prime minister has set the ball rolling,\" Ravi Gopalakrishnan, Mumbai-based chief investment officer for equities at Pramerica Asset Managers, the Indian unit of Prudential Financial Inc, said in an interview. \"Valuations are at historical lows. It makes sense to buy in this kind of an environment.\" ITC rose 3.4 per cent to 259.90 rupees, the highest since the stock began trading in 1991. ICICI Bank added 3.8 per cent to 889.45 rupees, the highest close since April 4. Options Prices Punj Lloyd Ltd, India\'s third-largest engineering company, rose 4.4 per cent to 48.85 rupees on plans to resume work next month in Libya, the North African nation where it has $800 million worth of projects, Chairman Atul Punj said. Cairn India Ltd, operator of the nation\'s biggest oil deposit on land, fell 6.1 per cent to 307.25 rupees. Cairn Energy Plc sold a 3.5 per cent stake in Cairn India at 308.73 rupees a share, the lower end of its proposed price range, said a person with direct knowledge of the matter. The S&P CNX Nifty Index on the National Stock Exchange of India Ltd rose 2.5 per cent to 5,278.90, and its July futures traded at 5,288. The BSE 200 Index climbed 2.3 per cent. India VIX, a gauge of options prices in the Nifty, fell 8.6 per cent to 18.84. Combined trading volume on India\'s top two bourses was 903.62 million shares yesterday, in line with the 12-month daily average of 902 million. Still, India is likely to face elevated inflation risks from supply bottlenecks and lingering threats to economic expansion, the Reserve Bank of India said. \"Threats to stability are posed by the global sovereign debt problem and risk aversion, domestic fiscal position, widening current-account deficit and structural aspects of food inflation,\" the central bank said in its Financial Stability Report released in Mumbai yesterday. Overseas investors bought a net $46.7 million of Indian stocks on June 27, raising their investment this year to $8.64 billion rupees, according to the nation\'s market regulator. They cut holdings by $273 million in May, a second month of net sales.