Mumbai: The benchmark Sensex zoomed 257 points Wednesday to its second-highest closing level as inflation eased, giving rise to expectations the Reserve Bank of India will keep interest rates on hold.
HDFC, ICICI Bank, ITC and Larsen & Toubro were the biggest contributors as all but one of the index shares gained.
Ten of the 12 BSE sectoral indices moved up, led by capital goods and bank stocks, while consumer durables and healthcare fell.
The S&P BSE Sensex opened higher at 21,091.46 and firmed up to the day's high of 21,302.73. It ended at 21,289.49, a gain of 256.61 points or 1.22 percent. It was highest closing level for the index since ending at a record 21,326.42 on December 9.
The 50-share CNX Nifty on the National Stock Exchange rose 79.05 points, or 1.27 percent, to 6,320.90.
Inflation as measured by the Wholesale Price Index (WPI) declined to a five-month low of 6.16 percentt in December.
"This data boosted market sentiments as they expect RBI to not hike interest rates in the near term. Rate-sensitive sectors such as banking, realty and auto attracted buying interest," said Nidhi Saraswat, Senior Research Analyst at Bonanza Portfolio Ltd.
Data released earlier this week showed retail inflation eased to three-month low of 9.87 percent last month. Factory output had contracted 2.1 percent in November.
While global cues also aided sentiment, second-line stocks underperformed the Sensex, indicating poor retail participation. The Mid Cap and Small Cap indices gained 0.18 percent and 0.30 percent, respectively.
Most Asian stocks closed higher on optimism the global economy is strengthening. Key indices in Hong Kong, Japan, Singapore, South Korea and Taiwan ended higher while China's Shanghai Composite fell.
The World Bank projected India's economy will expand by over 6 percent in 2014-15 while global GDP growth may firm up to 3.2 percent this year from 2.4 percent in 2013.
European markets were higher in early trade as indices in France, Germany and UK moved up. US stocks rose yesterday after better-than-forecast retail sales and corporate merger activity signalled confidence in the economy.
"Indian equity markets closed higher, tracking strong regional Asian stocks and Wall Street," said Jignesh Chaudhary, Head of Research at Veracity Broking Services.
"Moreover...There is expectation now that with the decrease in inflation figures, RBI will not be compelled to raise rates in the near future, which is required at the moment to channelise growth," he said.
The major Sensex gainers included Larsen & Toubro 2.71 percent, HDFC 2.56 percent, Sesa Sterlite 2.36 percent, BHEL 2.15 percent, ICICI Bank 2 percent and Coal India 1.81 percent.
Among the S&P BSE sectoral indices, Capital Goods rose 1.98 percent, followed by Bankex 1.59 percent, Realty 1.31 percent, Auto 1.22 percent, Metal 1.11 percent and Power 0.76 percent.
The market breadth turned positive as 1,375 stocks gained, 1,293 fell and 170 ruled steady. Total turnover rose to Rs 1,877.54 crore from Rs 1,685.79 crore yesterday.
The central bank is scheduled to announce its quarterly monetary policy on January 28.
"The easing of inflation at a time when industrial growth continues to be in the red should induce RBI to review its monetary policy stance and cut its policy rates to rejuvenate growth," CII Director General Chandrajit Banerjee said.