Earlier, the Sensex came close to breaching the key 17,000 mark, while the Nifty, too, came close to breaching the 5,150 support after the central bank's policy announcement. Rate sensitive stocks, particularly banks, saw the biggest selling pressure after the central bank kept the repo rate and the cash reserve ratio unchanged. It cut the statutory liquidity ratio by 1 per cent to 23 per cent to increase the liquidity in the economic system. But, analysts said RBI's move was unlikely to help because most of the state-run lenders were already invested in government securities because of lower demand for credit.
"While the move could potentially result in release of Rs 64,000 crore in the system, the overall SLR is already high at ~27-28% and PSU Banks are flush with SLR," domestic brokerage Religare said in its report.
However, even as investors were preparing for a down day, markets turned around suddenly. The Sensex gained 92 points or 0.54 per cent to 17,235, while the Nifty index advanced 29 points to end at 5,229.
Continued strength in global stocks helped sentiments. Markets in South Korea, Taiwan and Japan closed near the day's high. European markets also traded flat to positive in early trade.
There is some speculation that the ECB may resume its bond buying programme to bring down rising Spanish and Italian borrowing costs, but uncertainty persists partly because Germany has repeated its opposition to such a step.
Banking stocks ended significantly higher off the day's low. PSU lenders like Bank of Baroda and State Bank of India, the country's biggest lender, were among the top Nifty losers. BoB fell 2.4 per cent, while SBI ended 1.3 per cent lower.
Other rate sensitives like auto and realty closed in the green. Capital goods stocks also recovered, though power stocks ended marginally lower.
Consumer durables stocks took a big hit today, mainly on account of the underperformance in Titan Industries, which closed with over 4 per cent losses on the BSE. The Tata Group firm reported a sharp slowdown in its jewellery vertical.
Bharti Airtel, India's biggest mobile carrier was the top Nifty loser, falling nearly 3 per cent.
Textiles and cement Major Grasim Industries was the top Nifty gainer, rising 3.7 per cent. Realty major DLF advanced 3.6 per cent. State run oil explorer ONGC also closed with over 3 per cent gains on the Nifty index.
Analysts said the winning rally is unlikely to extend.
"Don't expect markets to move above 5,300... The next level of selling will start the moment Nifty gives a weekly negative close," Somil Mehta of Sharekhan told NDTV Profit.
On the Nifty 30 of the 50 stocks ended in the green. The market breadth was also positive as over 58 per cent stocks closed higher on the broader BSE 500 index.
(With inputs from Thomson Reuters)