Sensex started 2011 on a firm footing, climbing nearly 0.3% on Monday, with metal producers leading the gains as investors placed bets that the base metals rally was here to stay.
Firm world stocks also supported the gains.
U.S. copper futures rallied 1% on the first day of trade of the new year to a record 449.25 cent/lb ($9,904 a tonne), extending 2010's 33% gains on expectations of sustainable growth in top metal consumer China.
"There are no immediate negatives for metal stocks," Neeraj Dewan, director of Quantum Securities.
"The pack has been performing well on optimistic metals price outlook. Also, some companies hiked steel prices today."
Non-ferrous metals producer Sterlite Industries, part of London-listed Vedanta, rose 3.1%. Media reports said the company had raised copper prices but company officials were not immediately reachable to comment.
Steel Authority of India firmed 3% after the country's largest domestic steelmaker raised prices of its products by an average 1,000 rupees a tonne.
Tata Steel, world's seventh-largest maker of the alloy, rose 3.6% on expectations it may follow suit.
The 30-share BSE index rose for the fourth straight session and climbed 0.25%, or 51.96 points, to 20,561.05 points, with two-thirds of its components gaining.
Foreign funds poured in $29.3 billion in 2010, driving the benchmark index more than 17% higher, and market participants expect the interest to continue strong in 2011.
"We see no reason why the momentum should not continue," said Om Ahuja, head of private wealth management at Emkay Global.
The index gained 2.2% in the December quarter, its eighth straight quarterly gain.
"Economic growth is likely to continue strong. If the government is stable, we should see another good year."
India's manufacturing sector expanded at a slower pace in December than in the previous month, weighed down by a weakening growth in factory output and new orders, a survey showed.
But the December reading marked the 21st consecutive month that the key index of manufacturing in Asia's third-largest economy has been above the reading of 50, which divides growth from contraction.
Banking stocks advanced on expectations that loan demand would rise in the world's second-fastest growing major economy.
Lenders State Bank of India and HDFC Bank gained 0.4% and 1.9% respectively. ICICI Bank bucked the trend and shed 0.1%.
Most auto stocks erased most of early gains on profit booking, dealers said. They had rallied early, cheering robust sales for December.
Hero Honda closed flat. It had risen as much as 1.7% after the top motorcycle maker said its December sales rose by a third.
Tata Motors closed barely changed after climbing as much as 2.1% after it posted a 31% rise in December sales and raised prices of some vehicles.
Bajaj Auto dropped 4.2% even as it reported a 10% increase in December sales, as it failed to meet street expectations, dealers said.
More than two shares advanced for every share that declined, in a relatively lower volume of 384 million shares.
The 50-share NSE index gained 0.4% to 6,157.60.
World stocks measured by the MSCI All-Country World Index gained 0.2% at 1052 GMT, while emerging markets index firmed 0.8%.