The BSE Sensex jumped nearly 1 per cent on Tuesday tracking strength in global markets and strong buying in banking stocks. The 50-share Nifty traded above the key 6,050 mark and the rupee pulled back against the dollar.
The bank Nifty rose 1.3 per cent on fresh hopes that the central bank will cut lending rates on July 30 to boost the economy, notwithstanding the sharp fall in the rupee.
PSU banks - Punjab National Bank and Bank of Baroda - gained over 2 per cent, while private lenders such as Kotak Mahindra and ICICI Bank also rose 1.5-2 per cent.
Only six stocks traded lower on the Nifty, with Asian Paints falling over 2 per cent on weak results. Mobile carrier Bharti Airtel shed 0.5 per cent.
Shares in jewellery makers fell sharply on Tuesday following Reserve Bank's stringent conditions for gold importers, linking inward shipments to future exports. The decision is likely to make gold prices costlier and may impact demand.
Market analyst Sarvendra Srivastava advised investors to be cautious with the Nifty retracing close to 78 per cent of previous fall.
"6,090-6,100 remains the acid test and next couple of sessions are crucial," Mr Srivastava added.
MSCI's world index, which tracks stocks in 45 countries, gained 0.44 per cent to 375.49 in early trades. It was about 7 points below a five-year high set in late May. Asian markets also traded with strong gains, with Hong Kong's Hang Seng benchmark gaining over 2 per cent.
The Standard & Poor's 500 stock index hit a record closing high for a third straight session on Monday. Both the S&P 500 and the Dow hit all-time highs last week following a moderate pullback of fears that the Federal Reserve might reduce its bond-purchase stimulus later this year if the economy improves further.
(With inputs from Reuters)