The BSE Sensex gained 3.4 percent on Wednesday to its highest close since August 29, ending its 5-day losing streak, bolstered by bargain buying and firm global markets, although investor confidence remained frayed over slowing domestic growth and policy inaction.
The main 30-share BSE index bounced back from a 28-month low hit in the previous session, to close 510.13 points higher at 15,685.21, with all but two of its components rising.
It had shed 5.2 percent over the past five days as waning business confidence dented sentiment, triggering foreign fund outflows.
Battered financial stocks, which had contributed to the bank index's nearly 9 percent loss since the start of the month, rebounded on bargain buying.
Banking stocks have been under pressure after the RBI took measures to stem volatility in the rupee, which could reduce local lenders' profit from currency-related fee income.
"The recovery today is not going to sustain because the sentiment is still negative. Lack of any concrete measures is impacting confidence of not just foreign, but even domestic investors," said K.K. Mital, head of portfolio management at Globe Capital.
"India's growth is under pressure and the government needs to urgently step in and re-build that confidence."
Indian shares are down a quarter so far this year and are the worst performing major market globally. Foreign institutional investors have been net sellers of around $300 million so far in 2011, compared with a record investment of more than $29 billion in 2010.
A series of graft scandals has pushed the ruling coalition far away from building consensus on policy decisions that are pivotal in lifting investment and growth.
Earlier this month the federal government made an embarrassing retreat from opening up the retail sector to allow foreign players like Wal-Mart Stores Inc into the supermarket sector.
India's October industrial output fell for the first time in two years, shrinking 5.1 percent, and the central bank held interest rates unchanged last week after 13 rounds of increases since early 2010, citing increased growth risks.
The cabinet agreed on Sunday to tackle widespread malnutrition with food subsidies for two-thirds of the country's 1.2 billion population, a populist move that will add to a swollen fiscal deficit.
Global cues on Wednesday remained firm with European stocks rising as investors priced in an improvement in the economic outlook.
Energy major Reliance Industries , which has the heaviest weight on the index, rose 4.8 percent, while India's largest utility vehicles and tractor maker Mahindra and Mahindra jumped 6.2 percent, buoyed by improved risk appetite.
Ranbaxy Laboratories (RANB.NS) ended 3 percent up in volatile trade after the drugmaker said it would make a $500 million provision in connection with a U.S. probe.
The 50-share NSE index ended 3.3 percent up at 4,693.15. In the broader market, there were nearly two gainers for every loser, with 594.4 million shares changing hands.
At 1021 GMT, the MSCI's measure of Asian markets other than Japan was up 3.2 percent, while Japan's Nikkei as up 1.48 percent.
STOCKS THAT MOVED
Biocon (BION.NS) rose 5.7 percent after it said it has signed a collaborative clinical research services agreement with Pacific Biomarkers.
Microlender SKS Microfinance rose 4.9 percent after its shareholders approved raising the investment limit of foreign institutional investors in the company to 74 percent from 24 percent.
Telecom network service provider GTL Ltd and group firm GTL Infrastructure Ltd rose 11 and 8 percent, respectively, after the companies received final approval from lenders for restructuring loans worth 160 billion rupees.
MAIN TOP 3 BY VOLUME
Jaiprakash Associates on 29.1 million shares
Suzlon on 21.3 million shares
Tata Motors on 21.1 million shares