Expectations of more stimulus action from Japan to fast-track growth and another record close in the US laid the pitch for the rally.
But concerns lingered after WPI inflation accelerated for the third straight month in June hitting 1.62 per cent on costlier food and manufactured items, official data showed today.
June retail inflation, announced on Tuesday, was no better, which touched a 22-month high of 5.77 per cent.
There was good news on the monsoon front, which cheered investors. According to IMD, the country has so far received four per cent more rainfall than normal. The monsoon has also covered the entire country two days ahead of its normal date after reaching last frontiers of Kutch and Western Rajasthan.
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The covering-up of short positions aided the upmove.
But the suspense over a new RBI Governor continued to hold back investors.
The Sensex opened higher before settling at 27,942.11, a gain of 126.93 points, or 0.46 per cent. The barometer ended at 28,067.31 on August 14 last year. It had gained 688.28 points in the previous three sessions.
Globally, Asian markets followed overnight gains in the US, which saw a record close on the Wall Street and a higher opening in Europe. London's FTSE gained 0.8 per cent, Germany's DAX 1.3 per cent and Paris CAC 0.9 per cent in their early session.
As many as 22 scrips out of 30-share Sensex pack ended higher. ICICI Bank was right on top rising 2.72 per cent followed by Maruti Suzuki.
Shares of TCS ended 1.16 per cent higher ahead of earnings announcement.
Other big movers include SBI (2 per cent), Power Grid (1.82 per cent), GAIL (1.45 per cent) and Tata Motors (1.20 per cent).
Small-cap and mid-cap too firmed up 0.73 per cent and 0.54 per cent, respectively, on increased buying by retail investors.
Jewellery stocks hogged limelight after the government increased excise duty exemption limit for small scale industry to Rs 10 crore that could bring relief to gold jewellers. Yesterday, it also decided to waive the levy on sale of traded goods and relaxed other procedural norms.
Shares of Tara Jewellers soared, Shree Ganesh Jewellery House, Gitanjali Gems, Tribovandas Bhimji Zaveri, PC Jeweller and Titan Company surged by up to 6.45 per cent.
1.12 per cent, followed by infra with a rise of 0.99 per cent, banking 0.77 per cent, PSU 0.60 per cent, auto 0.57 per cent and power 0.55 per cent.
Broader markets too were in a better shape as investors made selective buying, with the BSE mid-cap rising 1.34 per cent while small-cap index gained 1.21 per cent.
Meanwhile, Foreign portfolio investors sold shares worth net Rs 593.61 crore on Monday, as per provisional data.
Stock Exchanges were closed yesterday on account of 'Id-ul-Zuha'.
In regional markets, Japanese stocks led decline by diving 0.69 per cent. Key indices in China, Hong Kong and Singapore dropped by up to 0.68 per cent.