Investors also expect the RBI to keep interest rates unchanged in a bid to support growth after the Index of Industrial Production contracted 2.1 per cent in November. There were hopes of inflation easing amid increased availability of winter crops.
There was buying across the board as 11 out of the 12 BSE sectoral indices advanced, led by IT, Teck, Oil & Gas, Banking and Capital Goods stocks. Only the Healthcare index fell.
The 30-share S&P BSE Sensex opened higher and stayed in positive terrain through the day. It ended at 21,134.21, a rise of 375.72 points or 1.81 per cent. It was the biggest gain since November 25, when the index added 387.69 points.
The Fed said it would reduce its bond-buying programme, which has been a source of liquidity for most Asian and emerging markets, from this month. US employment rose at the slowest pace in three years in December, according to a government report.
The 50-share CNX Nifty on the National Stock Exchange shot up 101.30 points, or 1.64 per cent, to 6,272.75.
"The markets seem to be anticipating a healthy inflation figure, since that would reinforce that the RBI's decision to not raise the headline repo rate last month was the correct decision," said Raghu Kumar, Cofounder of RKSV.