The BSE Sensex rose for a fifth straight session on Wednesday, to its highest close in nearly two months, riding on world markets which gained on expectations that Greece will ward off bankruptcy and avert the euro zone's first sovereign default.
But dealers believe that the rally has no legs and see the gains as temporary, as worries over India's inflation and rising interest rates continue to plague the outlook.
Financials led the gains, in an attempt to catch up after a poor performance this year. The sector index firmed 0.9%, but is still down 5.4% year to date.
The 30-share BSE index gained 1.09%, or 201.41 points at 18,693.86, its highest close since May 2, with 22 of its components gaining ground.
The benchmark had gained more than 5% in the previous four sessions on short-covering and buying to boost portfolio values before the quarter draws to a close.
"Market is rising on hopes Greece will have a solution to its woes soon," said Nilesh Doshi, president of equities at brokerage Techno Shares.
Foreign funds bought around $732 million of shares in three sessions to Monday, latest data from the market regulator showed, after dumping $688 million over the previous nine days.
"It is not a new bull trend. It can remain rangebound for a while. Big gains are ruled out due to our domestic issues," said Doshi.
Persistently high inflation and slowing economic growth have deterred investors from pumping money this year into India -- one of the most preferred investment destinations until recently.
"The economy is slowing down, and there is nothing that can turn around the economy overnight," said Doshi.
The index is down nearly 9% so far in 2011, making it one of the world's worst performers. Greece's parliament looked increasingly likely to approve an unpopular austerity measures on Wednesday, despite violent protests, to secure international funds to prevent a sovereign default of the country.
Top lender State Bank of India firmed 1.6%, while rivals ICICI Bank and HDFC Bank rose 0.4% and 2.7% respectively.
Mortgage lender Housing Development Finance Corp gained 0.9%.
Cigarette-to-hotels firm ITC firmed 2.9% on optimism over the outlook of its non-cigarette businesses, dealers said.
Export-driven software companies rose, lifting the sector index 0.7% and trimming the year-to-date loss to 12.3%.
Tata Consultancy Services, Infosys and Wipro firmed between 0.4% and 1.4%.
The 50-share NSE index gained nearly 1% to 5,600.45 points.
Advancing shares outnumbered declining ones in the ratio of 1.9 to 1 on the NSE. Around 631 million shares changed hands on the exchange, higher than its 5-day daily average volume of 603 million shares.
The MSCI all-country world stock index gained 0.7% by 1017 GMT, while the FTSEurofirst 300 index of top European shares rose 1.4%.