The BSE Sensex ended up 2% on Wednesday to their highest close in a month, propelled by large banks as risk appetite improved globally and after quarterly results showed the outlook for domestic companies was not as bad as initially feared.
Hero MotoCorp, India's largest motorcycle maker, rallied as much as 5% after it beat street estimates with a 19% rise in quarterly profit and said it was confident of boosting sales. It closed up 4.06%.
Credit Suisse and Bank of America have both forecast Hero MotoCorp's margins to expand further due to a softening in commodity prices and increased production.
"The corporate results that have come so far have shown better performance than market expectations," said RK Gupta managing director at Taurus Asset Management.
The main 30-share BSE index ended up 2.01% at 17,085.34 points, its highest closing level since Sept. 20, with all its components advancing.
The BSE index has risen nearly 4% so far in October, but is down 16.7% this year as high borrowing costs squeezed corporate profits and a series of government scandals paralysed government policy making.
HDFC Bank , the country's No 3 lender closed up nearly 3% at 491.85 rupees, after posting a 31.5% rise in quarterly profit, beating street estimates, on higher fee and net interest income and stable asset quality.
Bigger rival State Bank of India was up 2.78%, and ICICI Bank gained 3.15%.
Deutsche Bank said banking stocks were trading at trough valuations and named State Bank of India and HDFC Bank as its top picks in the sector.
Tata Motors, India's largest truck maker, ended up 3.14% on hopes sales will continue to improve.
The company, which also owns the premium Jaguar and Land Rover brands and the ultra-cheap Nano, had last week reported a 24% rise in global September sales.
"The numbers have been quite good. That should be seen as a kind of game changer for Tata Motors because in this kind of an environment they are having robust sales both for JLR as well as domestic brands," said Deven Choksey, CEO and managing director of KR Choksey.
Still, the outlook for the market remains clouded by concerns over rising interest rates amid slowing growth.
The central bank is widely expected to deliver another rate rise next Tuesday before pausing. It has already increased rates a dozen times since mid-March 2010 to fight high inflation.
Taurus' Gupta said the NSE index was likely to remain between 5,000 and 5,100 and unlikely to rise much in the next two or three sessions as the markets would wait for domestic triggers from the Indian central bank's policy review next Tuesday, followed by the monthly derivative contracts expiry.
"It's a difficult call for markets, there is a lot of uncertainty before next week's events," he said.
Reliance Industries, India's largest listed firm closed up 2.82%.
The stock has fallen about 20% since the beginning of the year as its growth outlook has been marred by falling gas output from its huge gas fields off India's east coast.
The 50-share NSE index ended up 2.02% at 5,139.15 points.
In the broader market, there were 942 gainers for 480 losers on total volumes of 543.2 million shares.
European stocks and the euro rose, on optimism policymakers will take major steps at a summit this weekend to solve the festering debt crisis and offsetting the impact from a cut to Spain's sovereign credit rating.
World stocks as measured by MSCI gained 0.75%, while emerging equities were up 1.16%.