The Sensex rose 0.3% on Monday in low volumes tracking firmer Asian peers, with infrastructure firms and banks leading the rise as investors bet these firms would draw the most foreign fund interest next year.
A strong growth outlook for India, making it an attractive investment destination, has most market players upbeat about the outlook for domestic equities in 2011.
However, shares in Anil Ambani's Reliance Communications fell as much as 3.6% after elder brother Mukesh Ambani's Reliance Industries on Friday denied market talk it was planning to invest in India's No 2 mobile operator.
The market rumour helped drive Reliance Communications shares up 10.5% on Friday.
Other Anil Ambani group firms Reliance Power, Reliance Mediaworks and Reliance Infrastructure, which had also gained on the talk, were down 1.1-2.1%.
"People are expecting next year's allocation to India to be higher, with specific sectors such as banks and infrastructure benefitting" said Gajendra Nagpal, chief executive of Unicon Financial.
Larsen & Toubro added 0.8%, while realtor DLF rose 0.9%.
By 12:16pm, the 30-share BSE Index was trading up 0.2% at 20,110.01 points, with 19 of its components advancing. The benchmark, which opened a tad lower, rose as much as 0.6% in early trades.
"However, I am not too confident the market will gain significant higher ground from these levels as there are no significant global cues and it is the holiday season," Nagpal said.
A bright outlook for loan demand in a fast-growing economy buoyed banking shares pushing the sector index up 0.2%.
Top private sector lender ICICI Bank rose 1%, while India's top lender State Bank of India dipped 0.03%.
Leading outsourcers Tata Consultancy Services, Infosys Technologies and Wipro added 0.5-0.8% on hopes of strong growth for the sector.
In the broader market, gainers led losers in the ratio of 1.6 to 1.
The benchmark index is up over 15% so far this year, on robust foreign fund inflow into Indian equities that stands at $28.4 billion, set to be the highest yearly inflow.
Dealers said metal producers declined as base metal prices were pressured after China's central bank raised interest rates over the weekend in an effort to curb inflation.
Sterlite Industries, Hindalco and Tata Steel were down between 0.8% and 1.5%.
The 50-share NSE index was up 0.2% at 6,021.75 points.
The MSCI's measure of Asian markets other than Japan was up 0.2%, while Japan's Nikkei was up 0.8%.