The BSE Sensex posted its biggest gains of the month on Tuesday, as investors picked up software services exporters such as Infosys that have recently under-performed and defensive shares such as Hindustan Unilever.
Shares have recovered after hitting their yearly lows on Friday, although the mood remains largely cautious ahead of the 2013/14 budget, to be unveiled on February 28.
Traders say a plan that seeks to narrow the country's fiscal and current account deficits would be key in reviving share markets that have largely fizzled out this month.
"Some game-changing reforms in area of deficit management is expected from budget," said Deven Choksey, MD, KR Choksey Securities, calling gains on Tuesday more liquidity-driven than a genuine rally.
The BSE Sensex rose 0.69 percent, or 134.64 points to end at 19,635.72, marking its biggest daily percentage gain since January 25, and a recovery after ending Friday at its lowest close of the year.
The 50-share Nifty rose 0.70 percent, or 41.50 points, to 5,939.70, also posting its biggest daily gain since January 25.
Shares of software services exporters were among the day's leading gainers on continued hopes earnings will improve in the fiscal year starting in April on the back of an improving global economy.
Tata Consultancy Services Ltd rose 1.28 percent, after falling 2.1 percent since hitting a record high on February 14.
Infosys Ltd shares rose 1.45 percent after falling 1.1 percent over the previous two sessions compared with a flat performance in the Nifty.
Defensives shares that have under-performed markets this year also gained.
Hindustan Unilever Ltd gained 1.4 percent after falling 10.4 percent this year as of Monday's close, while Cipla Ltd rose 2.05 percent after falling 8.32 percent this year.
Among other gainers, ACC Ltd rose 3 percent while Ambuja Cements Ltd added 1.36 percent after shareholders at each of the cement makers separately approved paying technology fees to controlling stakeholder Holcim Ltd of 1 percent of net annual sales.
The approvals removed an uncertainty that had been weighing on the Indian companies, as some investors had feared a protracted process over a decision that had been unpopular with shareholders.
Shares in DLF Ltd rose 3.5 percent, gaining for a second session on rising hopes about a recovery in earnings and lower net debt for the year after a company meeting with analysts last week.
Hotel Leelaventure Ltd shares surged 10 percent, after the company sold its IT park building in the city of Chennai for 1.7 billion rupees to Reliance Industries , which will help the hotel operator reduce debt.
Shares in Kingfisher Airlines rose by the daily limit of 5 percent after controlling stakeholder United Breweries Holdings Ltd raised the amount it can lend to the ailing carrier.
However, among decliners, Bharti Airtel Ltd shares fell 2 percent, while Idea Cellular Ltd ended down 0.23 percent on fears of rising competition after wireless broadband airwave holders were allowed to provide voice services after paying an additional fee.