The BSE Sensex rose 137 points on Tuesday as lenders recovered from recent steep falls after the RBI's move to purchase bonds eased concerns about the value of the sector's debt holdings.
The markets were also buoyed by a top government official's statement that India will finance its current account deficit fully in the fiscal year ending March without drawing down on its reserves, and will also contain the fiscal deficit at 4.8 per cent of GDP.
Gains also tracked a rise in global shares as investors tended to view the U.S. shutdown as temporary, and also as something that may further delay the Federal Reserve's plans to start closing downs its monetary stimulus.
However, outlook remains cautious for October as traders approach what is expected to be a weak earnings season with Infosys Ltd's results due on October 11, while the RBI is widely seen raising rates one more time in the near term.
"Market may remain sideways for sometime but it will correct further post earnings season as earnings would witness only single-digit growth for the gone by quarter with the second half being particularly bad," said Deven Choksey, managing director, K R Choksey Securities.
The Sensex rose 0.71 per cent, or 137.38 points, to end at 19,517.15.
The broader Nifty advanced 0.78 per cent, or 44.75 points, to end at 5,780.05.
Banking stocks rose after the RBI said it would buy up to 100 billion rupees of bonds via open market operations on October 7, sparking gains in bonds.
Lenders are the biggest holders of government bonds and the Reserve Bank of India's rate hike last month had raised concerns about the holdings.
ICICI Bank and HDFC Bank gained 3.1 per cent each.
Among state-owned banks, State Bank of India rose 1.8 per cent, while Bank of India ended 5.3 percent higher.
Tata Communications surged 7.3 per cent after South Africa's Vodacom Group said on Monday it was in exclusive talks to buy Tata's unlisted local unit, Neotel, in a potential $590 million deal.
Maruti Suzuki gained 1.6 per cent on higher-than-expected sales in September.
TVS Motor Company surged 9 per cent after the company said its sales in September rose 16 per cent to 197,409 units.
Financial Technologies (India) gained 2.3 per cent on short-covering in the futures market ahead of its exclusion from the equity derivatives segment.
However among stocks that fell, Hindustan Unilever fell 1.3 per cent after its parent company Unilever warned that a slowdown in its emerging markets accelerated in the third quarter.
Apollo Tyres ended 1.8 per cent lower after falling as much as 8.9 per cent on worries about possible high debt after Cooper Tire and Rubber Co shareholders approved the U.S. company's $2.5 billion sale to the Indian firm.
(Copyright Thomson Reuters 2013)