Snapping a three-day losing streak, the benchmark Sensex soared more than 300 points on Thursday on positive global cues as well as following relief to foreign investors on retrospective tax front.
The BSE Sensex rose 311.22 points or 1.22% to close at 25,764.78 points, while the NSE Nifty ended at 7,823 points, up 106 points or 1.37%.
With Tata Steel, HDFC and Axis Bank witnessing biggest gains, 27 out of 30 Sensex components ended in green.
"Two reasons why the market is up: one is that it was oversold and the other being positive US cues," Alex Mathews, head of research at Geojit BNP Paribas, told The Economic Times.
Sentiment was mainly supported by expectations that the US central bank would postpone the beginning of interest rate hike cycle amid growing uncertainty in the global markets.
However, markets are expected to see sell-off in the coming days, as some analysts said that today's rally is partly led by short covering.
"In the days to come the 30-share index Sensex can correct to 23,000- 24,000 and the Nifty at 7200," Gaurav Mehta of Ambit Capital told moneycontrol.com.
Banking stocks staged a recovery aftet witnessing selling pressure in the past few sessions. Realty stocks also traded higher on the growing expectations of a rate cut by the Reserve Bank of India (RBI) in September.
A fall in inflation to to a nine-month low of 3.8 percent in July due to lower food prices has widened the scope for the RBI rate cut at its September policy meeting.
Last wek, A Reuters' poll showed that there is a 60 percent probability for a repo rate cut by the RBI at its meeting next month, compared to its previous poll that estimated a rate cut in the final three months of the year.
Rajan had kept the repo rate unchanged at 7.25 percent at a meeting on August 4. Overall, the Central bank had the repo rate by 75bps so far this year.