The BSE Sensex rose over 300 points and the Nifty rose 2 percent on Wednesday on value buying in blue chip stocks after a fall of nearly 4 percent on Tuesday was seen as overdone, while IT shares surged on improving business outlook.
Shares also tracked a sharp recovery in the rupee after suspected heavy dollar selling by the RBI prevented the battered currency from slipping to a record low.
However, analysts say volatility may persist as the country faces its worst economic crunch since a balance of payments crisis two decades ago amid rising conviction that the Federal Reserve will trim its stimulus and Washington is seen moving closer to a military strike on Syria.
"It's hard to predict which way the market can go as negative newsflow continues to come at even lower levels," said Deven Choksey, managing director at K R Choksey Securities.
The broader Nifty rose 2 percent, or 106.65 points, to end at 5,448.10, closing above the psychologically important 5,400 level.
The benchmark BSE Sensex rose 1.83 percent, or 332.89 points, to end at 18,567.55.
IT shares surged on improving business outlook and rupee depreciation, dealers said.
Tata Consultancy Services Ltd ended 3.4 percent higher after earlier making its all-time high at 2,078.80 rupees while Infosys Ltd gained 2.6 percent after earlier hitting a record high of 3,139.90 rupees
Bank shares rose on hopes that the central bank may unwind its liquidity tightening measures soon now that Raghuram Rajan, a former chief economist at the International Monetary Fund (IMF), takes charge of affairs.
In a reminder of the uphill task he faces, a report on Wednesday showed that activity in India's services sector shrank in August for the second straight month for its lowest reading in four years.
Jet Airways (India) Ltd ended 5.7 percent higher as India's cabinet approved an accord with the United Arab Emirates to nearly quadruple airline seats between the two countries over three years.
The stock has risen 12.1 percent in three consecutive session of gains following Etihad Airways' comments on Sunday that it expected its investment in the Indian carrier to be cleared by Indian authorities "imminently".
Ipca Laboratories Ltd shares surged 7.6 percent after the company said in a statement that U.S. Food and Drug administration found its oral solid dosage formulations manufacturing facility in Pithampur 'acceptable'.
However, among decliners, real estate companies fell after the Reserve Bank of India said late on Tuesday that housing loans from banks to individuals should be closely linked to the stages of construction.