The government's decision to go ahead with the notification allowing foreign investment in multi-brand retail, aviation and broadcasting sectors despite widespread political opposition boosted sentiments on the Street. The government cut withholding taxes on overseas borrowing by local companies, sparking hopes of more reform measures in the coming days.
Samajwadi Party leader Mulayam Singh Yadav said his party will continue to extend external support to the UPA government. Mr Yadav's support comes at a crucial time as the ruling coalition has been reduced to a minority after the Trinamool Congress quit to protest against hike in fuel prices and the decision to allow foreign investment in the retail sector.
"The sentiment was beaten out of shape so this rally was expected. The strength in large caps indicates the rally will continue. Targets of 5,900-5,950 on the Nifty are possible now," independent analyst Sarvendra Srivastava said.
At 2 p.m., the Sensex traded 415 points or 2.3 per cent higher at 18,765 while the Nifty advanced 138 points to 5,692.
"Markets are responding to the fact that there are clear signs that domestic macroeconomic situations are being dealt with," Bharat Shah, executive director at ASK Group said.
Strong buying was seen in aviation and retail stocks. Debt laden Kingfisher Airlines surged over 5 per cent while SpiceJet traded with over 2.5 per cent gains. Pantaloon Retail shares traded over 6 per cent higher.
All groups of stocks traded higher on the BSE. Banking stocks surged 4 per cent. Power and capital goods stocks also traded with 4-5 per cent gains. On the Nifty, 47 of the 50 stocks traded higher.
Anil Ambani promoted Reliance Infra was up 11 per cent followed by state-run steel maker SAIL, which traded 8.6 per cent higher. Heavy equipment maker BHEL and private lender Axis Bank advanced over 7 per cent.
Markets in Asia closed with strong gains. European stocks also traded higher as stimulus measures from major central banks continued to buoy investor confidence, offsetting weak economic data.
(With inputs from Thomson Reuters)