Lenders contributed the most to the gains, as investors placed bets on bullish loan demand outlook in the world’s second-fastest growing major economy after China.
The Sensex gained 1.86 percent or 338.62 points to 18.560.05, with 26 of its components closing in the green. It logged its best single-day gain since May 26.
The benchmark index rose as much as 2.1 percent to 18,600.30 points, its highest since February 2008.
The benchmark index is up 6.3 percent so far in 2010, with foreign funds investing a net $13 billion in Indian equities, including primary market offerings.
For the year to date, it has outperformed its emerging BRIC powerhouses. Russia’s RTS index is up 1.8 percent so far in 2010, while Brazil’s Bovespa and China’s Shanghai Composite index are down 2.8 percent and 17.7 percent respectively.
Emerging market equity and bond funds saw a 14th straight week of inflows last week, although investors were cautious about further increasing their equity holdings in emerging economies, with net inflows into that category at $250 million, data from fund tracker EPFR showed late last Friday.
"It is really reflecting the euphoric sentiment in other markets and stronger data from the U.S. Let us not forget that, the rise we are seeing today is in response to a gain in world markets," said V.P. Chaturvedi, managing director of Tata Asset Management.
"I don’t know if the global sentiment has turned decisively because we have the situation that we have some positive news flow on one day and negative on another."
Reliance Communications shed 0.3 percent, as the second-largest mobile carrier’s plan to sell its telecoms tower business to GTL Infrastructure fell through, dealing a blow to its efforts to nearly halve its debt.
"In our view, the GTL deal would have resulted in a healthier balance sheet for RCOM, thereby making it easier to attract strategic investors," Daiwa Capital Markets said in a note, adding the failure raises uncertainty over the firm’s future restructuring efforts.
GTL Infrastructure closed 0.9 percent higher after declining as much as 6.3 percent in the day.
Leading lender State Bank of India firmed 3.1 percent while rivals ICICI Bank and HDFC Bank rose 3.8 percent and 0.6 percent respectively. Leading mortgage lender Housing Development Finance Corp firmed 0.7 percent.
Top car maker Maruticlimbed 2.5 percent after its parent, Japan’s Suzuki Motor Co, said it would build its fourth plant in India boosting output to 1.5 million units a year.
Outsourcers that reap most of their revenue from the United States rose after the better-than-expected U.S. payrolls data last Friday.
Sector leader Tata Consultancy Services rose 1.9 percent, while Infosys Technologies and Wipro firmed 2.2 percent and 0.8 percent respectively.
Firm metal prices in Shanghai and London pushed the metal makers higher.
Aluminium maker Hindalco Industries firmed 4.8 percent, after its chairman said last Friday the company plans to spend $2.1 billion in the current financial year ending in March.
Non-ferrous metals producer Sterlite Industries gained 3.7 percent while Tata Steel, world’s seventh-largest maker of the alloy, jumped 6.6 percent.
Advancing shares outpaced declining ones in a ratio of 2.3:1 in a relatively better volume of 497 million shares.
The 50-share NSE index gained 1.8 percent to 5,576.95 points. It rose to as much as 5,589.40 in the day, its highest level since January 2008.
At 1025 GMT, MSCI’s all-country world stock index rose 0.5 percent, while the more volatile emerging markets index gained 0.7 percent.
STOCKS THAT MOVED
* Hospital operator Fortis Healthcare firmed 1.3 percent to 161.50 rupees after a senior company executive said it is looking to list a real estate investment trust in Singapore in the next six months to house its property assets and is looking at a valuation of $600 million to $700 million.
* Drugmaker Aurobindo Pharma rose 1.8 percent to 1,063.75 rupees, after it signed licensing and supply agreements with AstraZeneca.
* IT services firm Persistent Systems gained 5 percent to 467.50 rupees, after BNP Paribas kicked off its coverage on the stock with a "buy" rating.
MAIN TOP 3 BY VOLUME
* Karuturi Global on nearly 13 million shares
* Prakash Steelage on 8.6 million shares
* Ispat Industries on 8.6 million shares
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