The Sensex on Monday snapped three sessions of mild losses to notch its highest close since mid-March, as recently hit banking stocks such as SBI recovered, while ONGC gained after posting a surge in quarterly earnings.
However, sentiment remained cautious ahead of inflation data on Tuesday. Wholesale prices are expected to have edged up in July, giving the Reserve Bank of India less room to cut interest rates at its policy review in mid-September.
Barring any big surprises in the WPI data, analysts said domestic markets could be stuck in range-bound trading as investors wait and hope for further action from the European Central Bank or the U.S. Federal Reserve.
At home, investors are keen to see whether the government announces new fiscal measures or other action to attract foreign investment, after newly-appointed Finance Minister Palaniappan Chidambaram said he was working on new initiatives.
"Only two things can change the equation, otherwise the market is stuck in a tight range. If there's any reforms announced, which is not very probable, or if the U.S. or European announce stimulus measures." Jagannadham Thunuguntla, head research at SMC investments and advisors Ltd.
"Inflation won't be low, and will remain high enough that RBI cannot cut interest rates. It is a poor monsoon that is tightening the hands of the RBI," added Thunuguntla.
The Sensex rose 0.43 percent to 17,633.45 points, its highest close since March 15.
The Nifty rose 0.52 percent to 5,347.90 points.
State Bank of India rose 1 percent, after earlier falling as much as 1.5 percent. Shares of India's biggest lender slumped 4.1 percent on Friday after reporting a surge in bad loans during the April-June quarter.
Earlier, Deutsche Bank downgraded SBI to "hold" from "buy", calling April-June "one of its worst quarters in terms of asset quality" in a report after the results.
State-run producer Oil & Natural Gas Corp rose 0.6 percent after the company reported over the weekend a higher-than-expected jump in quarterly profit.
Maruti Suzuki gained 1.6 percent on rising hopes the auto maker will announce a resumption of production at its Manesar plant after violent clashes between management and workers last month.
The chairman of India's largest car maker, R.C. Bhargava, told Reuters on Monday that a decision on the date of opening would come only once the company is satisfied about the safety and security of its employees.
Shares in DLF gained 1 percent on local media reports that India's biggest property developer has agreed to sell a 17.5 acre plot of land in central Mumbai to private developer Lodha Developers.
Lodha confirmed the purchase after the markets close, saying it paid 27 billion for the plot.
Reliance Industries rose 0.8 percent, extend a rally this month on hopes its stand-off with the government over its KG-D6 blocks would ease, as well as on improved optimism about its gross refining margins.
Shares of the private refiner have gained 6 percent so far in August compared with a 2.3 percent gain on the Nifty.
However, Tata Motors shares fell 1.6 percent, after already dropping 3.1 percent on Friday following its disappointing April-June earnings last week.