The benchmark BSE Sensex on Thursday crossed 19,000 points to hit a 15-month high on expectations of more reforms from the government, particularly in the insurance and pension sectors.
The initiatives were finally announced in the evening after market hours.
The Sensex rose 189 points, or 1%, at 19,058, adding R48,000 crore to investor wealth.
The Nifty of the National Stock Exchange also rose by 56.4 points, or 1%, at 5,788 - a 17-month high.
"Markets were enthused with the initial reform measures announced by the government," said Dipen Shah, head, private client group, research, Kotak Securities. "These coincided with the liquidity easing measures by the US and the EU central banks."
Realty, consumer durables, bank and consumer goods stocks were the biggest gainers.
Industry experts said the gain was also due to the rise in foreign institutional investment in the country.
"FIIs were net buyers on Wednesday and Thursday and bought shares worth R602 crore," said Alex Mathews, head, research, Geojit BNP Paribas Financial Services.
Investors were also encouraged after the country's services sector expanded at its fastest pace in seven months as a spurt in new business encouraged firms to hire more staff, according to a HSBC survey on Thursday, suggesting that the worst of the economic slump may be over.