The BSE Sensex rose over 2 percent on Thursday as blue chip shares including HDFC surged tracking a rebound in the rupee from a record low in the previous session after the Reserve Bank of India's (RBI) move to provide dollars directly to oil companies.
The rupee rebounded after the RBI announced late on Wednesday a special window "with immediate effect" to sell dollars to state-run oil companies through a designated bank.
Still, traders say the government will ultimately need to act to shore up India's sagging economy. Policymakers are at least seen scrambling for solutions to what some economists are now describing as a crisis.
Prime Minister Manmohan Singh also told parliament he was willing to make a statement on the state of the economy on Friday, when the lawmakers asked him what steps the government was considering to take to deal with the falling rupee.
"More government measures are expected but more walk than talk is required," said Deven Choksey, managing director of K R Choksey Securities.
The benchmark BSE index rose 2.25 percent, or 404.89 points, to end at 18,401.04, rising for a second consecutive session.
The broader NSE index rose 2.35 percent, or 124.05 points, to end at 5,409.05. It had risen as much as 2.7 percent earlier in the day but August derivatives expiry related selling weighed in the final hour of trade.
The stocks gained for the second day in spite of foreign selling of about $1.12 billion worth of shares in the previous nine sessions through Wednesday.
Whether shares can sustain the gains will depend on government action, traders said.
India's central bank should look into the possibility of monetising gold holdings, Trade Minister Anand Sharma said on Thursday, while Oil Minister Veerappa Moily said India is working out the details of measures aimed at lowering the country's fuel consumption.
Oil and Natural Gas Corp Ltd also gained 2.1 percent on expectations of a hike in diesel prices after parliament's monsoon session ends on September 6.
Software exporters such as Tata Consultancy Services and HCL rose to record highs on improving U.S. business prospects.
Tata Consultancy Services Ltd ended 2.1 percent higher after earlier making its all-time high at 1,970 rupees, while HCL Technologies Ltd rose 3.8 percent after hitting a record high of 1,026.15 rupees.
Tata Motors Ltd rose 2.7 percent after Barclays upgraded shares to "overweight" from "underweight", citing improving performance at unit Jaguar Land Rover Ltd.
However, among stocks that fell, Fortis Healthcare Ltd dropped 1.5 percent after Morgan Stanley downgraded it to "underweight" from "equal-weight", saying an improvement in margins/returns will take time as leverage remains high.