The Nifty rose to a 2-1/2 year high on Thursday, as lenders continued their rally on expectations of early rate cuts by the RBI, while four additions to the MSCI India index, including Wockhardt, also gained.
Expectations the Reserve Bank of India could cut interest rates as early as its next policy review on June 17 have risen sharply after data earlier this week showed inflation was easing and the RBI governor said it would be taken into account.
Indian shares have gained just over 4 percent so far this month, supported by strong buying from foreign investors.
Foreign investors were net buyers of 16.47 billion rupees of stocks on Wednesday, their single biggest day of buying since February 7.
Foreigners have been net buyers for 20 consecutive sessions, bringing in a net of $12.98 billion.
Analysts said they expected the rally to continue but there could be some profit-taking in the next few weeks.
"Global markets are doing extremely well, and we expect a good monsoon and improving corporate earnings to fuel further buying," said Alex Mathews, head of research at Geojit BNP Paribas.
The BSE Sensex closed up 0.17 percent, or 34.37 points, at 20,247.33.
The broader Nifty ended 0.38 percent higher, or 23.15 points, at 6169.90, its highest close since November, 2010.
All major sub-indices of the NSE, except technology and consumer goods, rose.
Among lenders, ICICI Bank Ltd rose 1.36 percent, Axis Bank Ltd gained 1.47 percent, HDFC Bank was up 1.11 percent, while state-run State Bank of India ended 1.54 percent higher.
Infrastructure and property stocks also gained on expectations cheaper loans would spur capital spending and home buying.
Engineering and construction company Jaiprakash Associates Ltd was the biggest gainer on the Nifty, ending 5.6 percent higher.
Another big gainer was Adani Ports and Special Economic Zone Ltd , whose shares rose 6.23 percent. Reliance Infrastructure Ltd and IRB Infrastructure Developers Ltd also rose.
Meanwhile, four stocks added by index compiler MSCI to its India index also rose.
Apollo Hospitals gained 8.2 percent, Wockhardt Ltd rose 0.97 percent, and GlaxoSmithKline Consumer Healthcare ended up 8.22 percent.
Oil India Ltd , which was also added to the MSCI Emerging Market index, closed up 2.32 percent.
Drugmaker Cipla Ltd's shares rose for a second day after shareholders of South Africa's Cipla Medpro overwhelmingly approved its $488 million takeover bid.
However, IT and consumer stocks were hit as investors covered short positions on banks and took profits. Infosys Ltd closed down 1.18 percent, while Tata Consultancy Services fell 1.19 percent. Until Thursday's losses, Infosys and TCS had gained over 5 percent this month.
Other recent outperformers also fell. Cigarette maker ITC Ltd closed down 1.59 percent, while Hindustan Unilever Ltd fell 2.75 percent.
Shares of Bajaj Auto fell 0.85 percent after it posted a near flat quarterly profit, hurt by weak sales volumes in its domestic and export markets.