The BSE Sensex rose for the third straight session on Wednesday, up 2 percent to its highest level in more than six months, as falling inflation bolstered appetite for shares in interest rate sensitive sectors such as banks, automobiles and infrastructure.
Data on Tuesday showed India's wholesale price index (WPI) rose a slower-than-expected 6.55 percent in January -- its lowest level in more than two years -- leading to a rally in automakers and financials on hopes of interest rate cuts.
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The top gainer on Wednesday was Tata Motors, which rose 7.4 percent to close at its life high of 287.85 rupees. The company reported a better-than-expected 40.5 percent rise in December quarter net profit on Monday.
Its global vehicle sales rose 21 percent in January led by strong sales of its luxury Jaguar Land Rover vehicles.
The stock, which was split into five in July-September last year, fell nearly 32 percent in 2011.
The main 30-share BSE stock index rose 535.84 points to close at 18,202.41 on Wednesday, its highest close since August 1, 2011. Twenty-seven of its components advanced.
The main index has risen more than 17 percent this year, with foreign institutional investors buying about $4.2 billion of Indian equities.
However, analysts are cautious.
"The rally is a big surprise for everybody ... and a correction is definitely seen sometime next week," R.K. Gupta, managing director, Taurus Mutual Fund, said.
"Lowering inflation and dilution of problems faced by Greece is leading to heavy buying in the market."
Top car maker Maruti Suzuki rose 2.8 percent and Mahindra & Mahindra rose 2.4 percent.
ICICI Bank rose 4 percent to lead gains while top lender SBI rose 2.3 percent. HDFC Bank was up 2.9 percent.
"From the strong quarterly earnings, it is clear that corporates are able to manage their treasury, and interest liabilities are coming down, which will help banks and automakers," Gupta said.
Engineering conglomerate Larsen & Toubro jumped 5.5 percent and construction company Jaiprakash Associates rallied 8 percent.
Shares in power utilities soared after the government ordered state-run miner Coal India to sign 20-year guaranteed fuel supply contracts with power producers for projects that would be ready for generation by March 2015.
Adani Power surged 13.8 percent, Reliance Power 12.9 percent, Tata Power 5.9 percent and JSW Energy more than 7 percent.
Energy major Reliance Industries fell 1.44 percent to 836.65 rupees.
HSBC downgraded Reliance to underweight from neutral in the backdrop of the recent stock run-up in response to the company's share buyback announcement.
Reliance's existing exploration and refinery businesses are under pressure owing to falling gas production and a decrease in downstream margins, the bank said.
Gas output from Reliance's D6 block may be 66 percent lower than initial estimate from April, government sources said on Tuesday.
State-run explorer ONGC extended gains and rose 1.1 percent after a panel of Indian ministers approved a plan to sell shares in the company through an auction but did not set a timeline.
Power equipment maker BHEL rose 4.6 percent after federal Heavy Industries Minister Praful Patel said follow-on share sale in the company would happen in the next fiscal year starting April.
The MSCI's measure of Asian markets other than Japan was up 1.65 percent, while Japan's Nikkei was 2.3 percent higher.
The 50-share NSE index was up 2.14 percent at 5,531.95. There were 2.4 gainers for every loser in the broader market on a heavy volume of 1.31 billion shares.
STOCKS THAT MOVED
Educomp Solutions fell 4.9 percent after its quarterly profit slumped 75 percent.
Offshore services firm Great Offshore soared 20 percent after it posted a four-fold jump in December quarter net profit.
Max India rose 4.4 percent after the Economic Times newspaper reported New York Life Insurance Co was in talks to sell its stake in life insurance joint venture with Max India. A spokesman for Max India could not be immediately reached for comment by Reuters.
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Asahi Songwon Colors surged 12.5 percent to 101 rupees after Clariant Chemicals India said it acquired 5.86 percent in Asahi through a block deal at 92.5 rupees a share.
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Lanco Infratech on 82.98 million shares
GVK Power on 44.17 million shares
Unitech on 43.04 million shares