The BSE Sensex surged on Thursday to close at its highest in 19 months after the government agreed to a vote in parliament on allowing foreign entry in multi-brand retail, raising hopes that key reforms will pass through.
Shares were further boosted after Goldman Sachs upgraded Indian stocks to 'overweight' from 'market-weight', citing growth recovery and inflation moderation ahead. The investment bank pegged the December 2013 Nifty target at 6,600 points.
Traders say Moody's stable outlook on India has also eased a potential ratings downgrade worries from Standard & Poor's and Fitch in the near term, adding to positive sentiment.
The rupee also appreciated by more than 1 percent versus the dollar, further helping the markets. Globally, shares rose on Thursday after a senior U.S. lawmaker said the "fiscal cliff" might be resolved.
"India is far larger than just retail, but there is some significance attached to it, so if FDI goes through, it will imply the government means business," said Paras Adenwala, MD & Principal Portfolio Manager, Capital Portfolio Advisors.
"Even if some bills are cleared in the ongoing session of parliament, it would be taken constructively by investors."
The BSE Sensex ended up 1.75 percent, or 328.83 points, at 19,170.91, its highest close since April 28, 2011
The 50-share Nifty gained 1.7 percent, or 97.55 points, to 5,825.00, on the last day of the November F&O series with high volumes. This was its highest close since April 27, 2011.
The market is awaiting the September-quarter gross domestic product data due to be released at 11 a.m. on Friday, with growth seen slowing to its lowest in nearly a decade for the year ending in March.
Rate-sensitive stocks such as ICICI Bank rallied on hopes the central bank may cut policy rates if it is satisfied with government measures to reduce fiscal deficit.
Banks also rose on hopes that government would raise the cap on foreign direct investment in insurance, and open the pension sector to foreign investors, tracking new-found optimism around FDI in retail.
ICICI Bank rose 4.6 percent, while HDFC Bank> gained 2.8 percent.
Cinemax India Ltd
Shares in PVR also gained 6.4 percent.
However, among stocks that fell, India's GMR Infrastructure fell 1.4 percent after Maldives cancelled its biggest foreign investment project, a $511 million deal with GMR to develop an international airport.
Shares in Apollo Hospitals Enterprise fell 8.1 percent a day after a source said brokerage CLSA is selling its stake for $135 million.
Several block deals were struck in shares of Apollo Hospitals in the range of 821.75-836 rupees on the BSE and NSE, according to Reuters data.