The BSE Sensex turned positive for the year after rising more than 1 % for its biggest daily gain since mid-January on Tuesday, as strong buying by foreign investors sparked optimism about blue-chips such as ICICI Bank.
The gains were helped by a recovery in emerging markets following signs that Russia may be seeking to avoid further escalation of its military involvement in Ukraine, although gains in India far outperformed the region.
India is the second equity market after Indonesia, among the "Fragile Five" economies seen vulnerable to the US Federal Reserve's stimulus tapering, that has turned positive for 2014, as a more stable currency and a sharply narrower current account deficit has attracted foreign flows.
Overseas investors bought Indian shares worth 1.98 billion rupees on Monday, extending their buying streak to the twelfth day for a total of $765 million.
"Sustained liquidity is always important, but more importantly this liquidity is backing India's improving fundamentals. I think the rally has more legs," said G. Chokkalingam, founder of research and fund advisory company Equinomics.
The BSE Sensex 1.26 %, or 263.08 points, to end at 21,209.73, its biggest daily %age gain since January 13, and well beyond the 0.15 % gain in the MSCI Asia-Pacific index excluding Japan.
The BSE Sensex is now up 0.2 % for the year, having recovered since last month from its 3.1 % fall in January.
Nifty rose 1.23 %, or 76.50 points, to end at 6,297.95 on Tuesday, just 6 points away from turning positive for 2014, also marking its biggest single-day gain since January 15.
Bank stocks surged 2.6 %, their biggest single-day gain since December 9, 2013.
Axis Bank <AXBK.NS> rose 3 %, while ICICI Bank Ltd surged 3.8 %.
Among other blue-chips, Reliance Industries rose 1.2 %, while Larsen and Toubro Ltd gained 1.7 %.
Bharat Heavy Electricals Ltd rose 2.6 % after Life Insurance Corporation of India on Monday bought a 4.66 % stake in it from the government of India in a block deal totalling 18.89 billion rupees.
Dhanlaxmi Bank Ltd jumped 15.5 % after the small lender said it would issue 59.7 million shares on a preferential basis to investors it did not identify, for 39 rupees each.
However, among stocks that fell, Dr Reddy's Laboratories ended 0.5 % down, on concerns that sales in Russia and Ukraine would be hit, given military tensions between the two countries.
Dr. Reddy's has the highest exposure to Russia and the former Soviet republics, with the region accounting for 14.5 % of sales, Bank of America-Merrill Lynch said in a note.