The Sensex rose 1.8 percent on Monday to mark its biggest daily percentage gain in a month, as blue chips such as Infosys rallied with other global risk assets on hopes for monetary stimulus in the euro zone and the United States.
The prospect for global easing measures are raising hope the Reserve Bank of India could surprise markets with an interest rate cut on Tuesday, despite an overwhelming number of analysts who expect the repo rate to remain unchanged.
A rate cut would also fly in the face of hawkish warnings from RBI governor Duvvuri Subbarao, who has warned about inflationary pressures, while prodding the government to pass policy and fiscal reforms.
Still, those who expect rate cuts also argue the RBI may not be able to ignore the economic slowdown, while saying core inflation remains below 5 percent, offsetting the potential impact on food prices from weaker-than-expected monsoon rains.
"There is a great chances the RBI will chip in with a surprise 25 basis points cuts on repo rate," said Vaibhav Sanghavi, director at Ambit Capital.
"More important thing to look forward is any movement on reform process, along with stability in Europe will aid the market on the positive side," he said.
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The 30-share Sensex rose 1.81 percent to 17,143.68 points, its biggest daily percentage gain since June 29, after already gaining 1.2 percent on Friday.
The 50-share Nifty gained 1.96 percent to end at 5,199.80 points.
Blue chips, especially those that tumbled in July, rallied.
Infosys , India's second biggest software services exporter, rose 2.84 percent, after slumping 14.4 percent in the month to Friday.
Tata Motors rose 4.16 percent, having dropped 12.2 percent so far this month as of Friday's close.
Banks also rallied on the back of bets on a surprise move from the RBI on Tuesday and hopes the sector was reducing its non-performing assets.
ICICI Bank added 3.91 percent, rising for a second consecutive session after its better-than-expected April-June results on Friday.
Among other gainers, budge air carrier SpiceJet Ltd jumped 22.4 percent after it posted an unexpected quarterly profit on Monday that raised hopes of a turnaround in the country's embattled aviation industry.
Jet Airways rose 7.7 percent, while Kingfisher Airlines ended 2.1 percent higher.
Shares in GAIL (India) rose 3 percent up after April-June net profit surged 15.1 percent from a year ago, while IRB Infrastructure Developers surged 10.53 percent beating estimates on Friday with a 6 percent gain in net profit.
Wind turbine maker Suzlon Energy Ltd surged 11.4 percent after saying on Friday it had redeemed its $360 million of foreign currency convertible bonds through various instruments.
However, among laggards, Maruti Suzuki rose 0.6 percent, under-performing the broader indexes.
Macquarie downgraded India's biggest auto maker to "neutral" from "outperform", while HSBC cut its target price, with both brokerages citing the disrupted production at its Manesar plant as a key reason.