The Sensex and Nifty hit record highs on Monday as lenders such as Axis Bank rallied ahead of their financial results starting later this week, while strong gains in debt markets reduced concerns about potential losses in the sector's bond portfolios.
Sentiment also got a boost after the Supreme Court allowed resumption of mining in Goa, sending shares in miners such as Sesa Sterlite surging.
Overseas investors, who have pumped in nearly $4.8 billion into Indian shares so far this year, were net buyers worth 4.3 billion rupees ($71.20 million) on Thursday, snapping three days of a selling streak totalling 5.69 billion rupees ($94.21 million), exchange and regulatory data showed.
Still, analysts warned the stock markets were unlikely to sustain strong gains given the Nifty is already up 8.2% so far this year while caution is likely to prevail ahead of the outcome of the elections next month.
"We think markets will trade range-bound, and do expect profit-taking at higher levels. We have seen even FIIs have started booking profits. So, one should be careful in entering a position," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.
The Sensex closed 0.6% higher at 22,764.83.
The Nifty ended 0.56% higher at 6,817.65.
Banking shares led the gains, with the sector's sub-index up 1.34% on hopes banks will show sturdier earnings when they start reporting their financial results later this week.
Concerns about potential mark-to-market losses in their bond portfolios were also calmed after the central bank fully sold the 200 billion rupees ($3.31 billion) worth of debt on offer on Thursday without any devolvements.
Axis Bank Ltd rose 2.67% while ICICI Bank gained 1.52%. Both the banks are set to report their earnings on Friday.
State-run lenders also gained, with State Bank of India ending up 2.72%.
A ruling by the Supreme Court allowing mining from Goa of up to 20 million tonnes iron ores a year boosted miners. Sesa Sterlite rose 4.64%, its biggest single-day gain since Dec. 9, 2013.
Capital goods and auto stocks also gained sharply as dealers cited strong buying by foreign institutional investors. Larsen and Toubro gained 4.2% while Mahindra & Mahindra gained 3.6%.
Among other gainers, Natco Pharma Ltd gained 7.5% after U.S. Supreme Court Chief Justice John Roberts denied a request by Teva Pharmaceutical Industries Ltd to stay a lower-court ruling in a patent case that favoured the developers of generic versions of Teva's multiple sclerosis drug.
Shares in AstraZeneca India gained 4.3% after the Sunday Times newspaper reported Pfizer Inc approached its parent AstraZeneca PLC to propose a 60 billion pound ($101 billion) takeover.
However, shares in third largest software exporter, Wipro Ltd plunged 6.8% after the company's IT revenue guidance was seen as below estimates by some analysts.
($1 = 60.3950 rupees)