The Sensex ended 242.77 points up, or 1.23 per cent, to close at 19,906.41, a level last seen on January 6, 2011, soon after the government postponed General Anti Avoidance Rule (GAAR) for two years till April 2016.
Similarly, the National Stock Exchange index Nifty shot up by 72.75 points, or 1.22 per cent, to 6,024.05 as heavy-weight Infosys drove the software sector stocks higher after posting attractive revenue guidelines.
Realty and banking stocks were also star-performers after lower-than-estimated government inflation boosted speculation that the Reserve Bank of India might cut interest rates in its third quarter review of monetary policy on January 29.
Inflation based on wholesale prices declined to 7.18 per cent in December.
"The market sentiment was boosted by Finance Minister P Chidambaram's decision to defer implementation of General Anti-Avoidance Rules (GAAR) from April 2014 to 2016," said Sanjeev Zarbade, Vice President- Private Client Group Research, Kotak Securities.
"Post the December inflation number, expectations of a rate cut have further strengthened the sentiment, he added.
Infosys stocks surged by Rs 94.65 to Rs 2,807.25 and CMC Ltd by Rs 36.40 to Rs 1,371.25 driven by reports of better third quarter earning results. Tata Consultancy, HCL Technologies, Mahindra Satyam and Tech Mahindra were other gainers.
In the banking sector, State Bank of India shot up by Rs 8.50 to Rs 2,499.45, ICICI Bank by Rs 19.40 to Rs 1,184.70, HDFC Ltd by Rs 15.60 to Rs 825.20 and Bank of India by Rs 17.50 to Rs 381.50.
The rate-sensitive realty sector index gained the most by rising 5.01 per cent to 2,252.25 as segment major DLF Ltd shot up by Rs 17.80 to Rs 247.85. The IT sector was second best by adding 2.57 per cent to 6,413.25 followed by banking index by 1.07 per cent to 14,653.72.
The rally was partly supported by a firming trend in the Asian region and higher opening in Europe after Federal Reserve Bank of Chicago said the central bank should continue to support the global economic recovery.
