The Nifty witnessed a pull-back rally on the back of short covering as hike in petrol prices and gains in European markets boosted sentiments. All the sectoral indices ended in green with banks, oil & gas and metals leading the upmove.
According to analysts, the sentiment seems to have turned bullish on expectations of price hike in diesel and LPG which will help reduce subsidy burden and lower fiscal deficit as well.
"A price hike in these products (diesel & LPG) would reduce the under recoveries and hence the fiscal burden on the government. On the policy front too, the government needs to give signals that it is serious in regards with policy reforms. Any announcement or intent on FDI policy front, like aviation, multi-brand retail etc. would further boost sentiments of domestic and institutional investors," said Krupesh Thakkar, Senior Executive, Practical Financial Services.
"All these measures (fuel price hike and policy reforms) would help the rupee stabilize and control the fiscal and current account deficit," he added.
Meanwhile, the rupee strengthened against the dollar following a rally in the Indian market. The partially convertible rupee was at 55.75, up 25 paise, against the previous close of 56. It hit a record low of Rs 56.38 earlier in the day.
Last evening, the government hiked petrol prices by Rs 7.50 per litre effective today to improve the country's fiscal health and to counter sharp decline in the rupee against the dollar.
The Nifty ended at 4,921.40, up 85.75 points or 1.77 per cent. The broader index touched an intra-day high of 4,931.90 and a low of 4,830.15.
The Sensex closed at 16,222.30, up 274.20 points or 1.72 per cent. It touched an intra-day high of 16,252.37 and a low of 15,934.77.
The BSE Midcap Index was up 0.76 per cent and the BSE Smallcap Index gained 0.75 per cent.
Among the sectoral indices, the BSE Bankex was up 2.33 per cent, the BSE Oil & Gas Index gained 1.98 per cent, the BSE Metal Index moved up 1.36 per cent and the BSE Auto Index advanced 1.13 per cent.
ONGC (6.08%), Bharti Airtel (5.32%), Bank of Baroda (5.21%), Ranbaxy Laboratories (5.07%) and HDFC (4.41%) were among the top Nifty gainers.
Bharti Airtel announced its partnership with Qualcomm by acquiring 49% stake in Qualcomm Asia Pacific's Indian BWA entities.
"ONGC had given a false breakdown below Rs 250. Now, if all goes well i.e. if diesel price is also hiked then chances are it could rally back towards maybe Rs 285-290. One needs to keep a stoploss of about Rs 240 as it is still a range bound stock," said Ashwani Gujral, Fund Manager, ashwanigujral.com
Jaiprakash Associates (1.08%), Cairn India (0.95%), Maruti Suzuki (0.70%), Hindustan Unilever (0.47%) and GAIL (0.42%) were among the major losers.
Market breadth was positive on the NSE with 915 gainers against 524 losers.
The European markets were also witnessing buying action. The FTSE 100 was up 1.42 per cent, the CAC 40 rallied 1.27 percent and the DAX moved 0.66 per cent.