The broad-based National Stock Exchange index Nifty rose by 28.10 points, or 0.48%, to 5,879.60.
Brokers said the easing inflation raised hopes that the Reserve Bank of India would cut interest rate in its quarterly policy meet next week.
They said the sentiment further bolstered as Finance Minister P Chidambaram said some more steps will be taken in next few weeks to turn around the economy.
Inflation declined to 7.24% in November mainly on account of lower prices of some vegetables, giving a cue to RBI to consider interest rate cut next week to promote sagging growth.
In 30-BSE index components, 14 stocks gained led by Reliance Industries, Jindal Steel, ICICI Bank, Hindalco, State Bank of India and Sterlite Industries.
The metal sector gained the most by 2.31% to 10,569.90 followed by banking index 1.27% to 14,264.80 as investors felt any further boost to the economic reforms would push up these sectors.