Indian shares posted their biggest daily gain this month on Wednesday as banks advanced on hopes the central bank would continue to inject liquidity, while Larsen & Toubro rose after the government extended interest subsidies for some exporters.
Energy shares such as Reliance Industries also gained on hopes a government-appointed panel looking at oil and gas exploration contracts would recommend a pricing formula that could sharply raise the price of natural gas.
Credit Analysis and Research Ltd (CARE) was another top gainer for the day, making its debut in the stock market after raising $98 million in an initial price offering, in the first of three companies that will list this week.
Broader sentiment was also underpinned by strong recent buying by foreign institutional investors, who bought a net $719 million in domestic stocks on Dec. 24, the biggest single-day inflow since Oct. 5, bringing their total for the year to $24.05 billion.
"Even thought FIIs are on vacation there is a very high underlying demand. Flows so far have been positive," said Hitash Dang, vice president at Jaypee Capital.
"Every time there is a correction there are new entrants or there is again a buying opportunity," Dang added.
The benchmark BSE index rose 0.84 percent, or 162.37 points, to end at 19,417.46, its biggest percentage gain since Nov. 30.
The broader NSE index rose 0.85 percent, or 49.85 points, to end at 5,905.60, also posting its biggest gain since Nov. 30.
Banks rose after the central bank announced plans to buy 80 billion rupees ($1.5 billion) of bonds via open market operations on Dec. 28, marking the fourth consecutive weekly debt purchase.
The actions from the Reserve Bank of India brought some relief as advance tax outflows and an increase in government's cash balance with the RBI have temporarily exacerbated liquidity tightness in the banking sector.
ICICI Bank rose 2.4 percent, while State Bank of India gained 1.7 percent.
Bharat Heavy Electricals gained 1.14 percent while Larsen & Toubro ended 2.3 percent higher after the government announced incentives to revive growth in exports, including extending an interest rate subsidy for some exporters.
Reliance Industries rose 0.9 percent. The so-called Rangarajan committee has submitted its recommendations to the Prime Minister's Office this month, and media reports say one of the proposals include a new pricing formula for natural gas that could raise prices substantially.
CARE shares rose 23 percent from its IPO price of 750 rupees as investors who missed out on the IPO allocations bought the stock due to optimism about its outlook.
However, Kingfisher shares fell 0.31 percent after India's aviation minister said a revival plan submitted by the firm was not backed by a clear funding proposal.
The carrier had on Monday submitted a revival plan to resume operations after having flying licence suspended in October.
Auto-maker Tata Motors Ltd fell 0.3 percent on profit-booking after the shares had gained 12 percent this month, as of Monday's close.