The BSE Sensex rose for a sixth consecutive session to close at its highest since February 23 on rising hopes for government reforms after the aviation minister signalled the country was moving to allow foreign direct investment into the sector.
Allowing foreign carriers to invest in the sector would help cement expectations for further government action, with investors also hopeful India will open up the multi-brand retail sector and raise fuel prices to lower its subsidy burden.
Gains in local shares on Wednesday also tracked a risk-on mood globally, after Germany's top court backed the legality of the euro zone bailout funds, although with conditions.
Investors are also hopeful the Federal Reserve will announce new U.S. asset purchases when it concludes its two-day meeting on Thursday, although some analysts warned of the dangers of relying on liquidity that is driven by global risk factors.
"The path is laid for FDI in aviation to go through,"said Ambareesh Baliga, chief operating officer at Way2Wealth Securities.
"International cues such as German court ruling are triggers which will take the market up for a while. But markets cannot sustain those higher levels unless you have a fundamental domestic reason to keep it up," Baliga added.
0.82 percent to end at 18,000.03 points, just above the psychologically key level of 18,000 points.
The Nifty rose 0.76 percent to mark its highest close since March 14.
Data on Wednesday showing India's industrial output rose 0.1 percent in July, just below expectations for a 0.3 percent increase, had little impact in markets.
Instead, investors cheered comments from India's civil aviation minister Ajit Singh saying he had talked to most of the government's political allies on opening up the sector, raising hopes action could be near.
Policy reforms are seen key for a country facing ratings downgrades into sub-investment grade.
HSBC downgraded Indian stocks to "underweight" from "neutral" on Wednesday, citing the government's lack of progress in fiscal or structural reforms as a key factor.
Under current rules, foreign airlines are barred from buying stakes in domestic carriers, although foreign investors are allowed to hold a cumulative 49 percent.
Shares in Tata Motors
Shares in Gujarat State Petronet Ltd
However, shares in Reliance Mediaworks
Shares in the Indian unit of Siemens