The benchmark Sensex zoomed 257 points today to its second-highest closing level as inflation eased, giving rise to expectations the Reserve Bank of India will keep interest rates on hold.
HDFC, ICICI Bank, ITC and Larsen & Toubro were the biggest contributors as all but one of the index shares gained.
Ten of the 12 BSE sectoral indices moved up, led by capital goods and bank stocks, while consumer durables and healthcare fell.
The S&P BSE Sensex opened higher at 21,091.46 and firmed up to the day's high of 21,302.73. It ended at 21,289.49, a gain of 256.61 points or 1.22 per cent. It was highest closing level for the index since ending at a record 21,326.42 on December 9.
The 50-share CNX Nifty on the National Stock Exchange rose 79.05 points, or 1.27 per cent, to 6,320.90.
Inflation as measured by the Wholesale Price Index (WPI) declined to a five-month low of 6.16 pct in December.
"This data boosted market sentiments as they expect RBI to not hike interest rates in the near term. Rate-sensitive sectors such as banking, realty and auto attracted buying interest," said Nidhi Saraswat, Senior Research Analyst at Bonanza Portfolio Ltd.
Data released earlier this week showed retail inflation eased to three-month low of 9.87 per cent last month. Factory output had contracted 2.1 per cent in November.
While global cues also aided sentiment, second-line stocks underperformed the Sensex, indicating poor retail participation. The Mid Cap and Small Cap indices gained 0.18 per cent and 0.30 per cent, respectively.
Most Asian stocks closed higher on optimism the global economy is strengthening. Key indices in Hong Kong, Japan, Singapore, South Korea and Taiwan ended higher while China's Shanghai Composite fell.
The World Bank projected India's economy will expand by over 6 per cent in 2014-15 while global GDP growth may firm up to 3.2 per cent this year from 2.4 per cent in 2013.
