In a volatile session, the benchmark Sensex on Tuesday rose by 185 points in the last 90 minutes of trade as investors cheered RBI governor Raghuram Rajan's move to give more funds to banks for lending even as he left interest rates unchanged for the third straight time.
Firm European trends amid renewed buying by foreign funds in sectors like auto, consumer durables and realty also boosted the market sentiment, brokers said.
The Reserve Bank of India in its third bi-monthly monetary policy on Tuesday kept the key policy rate unchanged but slashed statutory liquidity ratio (SLR) by 0.5% to unlock about Rs 40,000 crore into the system.
Also, it reduced the ceiling of banks total holdings of SLR securities under the held to maturity to 24% from 24.5% of net demand and time liabilities.
The BSE 30-share Sensex resumed strong but fell back by over 160 points at 25,562.36 after morning session when the RBI announced its monetary policy review.
Later, it bounced back after mid-session and closed up by 184.85 points, or 0.72%, at 25,908.01. In straight two days, Sensex has now spurted by 427.17 points or 1.68%.
M&M, ONGC, Tata Motors and HDFC led the recovery.
Similarly, the wide-based 50-issue CNX Nifty of the NSE also gyrated in a range of 7,752.45 and 7,638.05 before ending at 7,746.55, a net gain of 62.90 points or 0.82%.
"RBI credit policy was a positive for markets. The cut in SLR by 50 bps will provide sufficient liquidity," said Kiran Kumar Kavikondala, director and CEO, WealthRays Securities.
Although RBI kept the benchmark repurchase rate at 8% unchanged, some feel rate cuts could come sooner. "We note the change in the RBI's commentary compared to its explicit hawkish stance earlier this year, at least up until the April 2014 policy. We continue to expect a cumulative 50bps easing in policy rates by end-2014." said Barclays.
Index-based shares like Infosys, HDFC Bank, Sun Pharma, ITC, Bajaj Auto, Tata Steel, Sesa Sterlite and Hindalco closed with sharp to marked gains and supported the Sensex rise.
Meanwhile, an HSBC survey said the country's services logged the third consecutive month of expansion in July but the headline HSBC Services Business Activity Index stood at 52.2 in July, down from June 17-month peak of 54.4 due to moderation in business flows.
Foreign Institutional Investors (FIIs) turned net buyers and picked up shares worth Rs 372.56 crore on Monday, as per provisional data with stock exchanges.
Asian stocks on Tuesday ended mixed with downward bias with Shanghai shares retreating from the year's highest close as a private gauge of Chinese services industries fell to a record low. Key benchmark indices in Japan, China, Taiwan and South Korea closed lower while from Hong Kong and Singapore finished better.
However, European markets were trading higher in their late morning deals. The DAX was up by 0.46%, the CAC by 0.49% and the FTSE by 0.42%.
Back home, 20 scrips out of the 30-share Sensex pack ended higher while 10 others finished lower.
Major Sensex gainers included M&M 3.83%, ONGC 3.18%, Bajaj Auto 2.71%, Hindalco 2.68%, Tata Motors 2.20% and Tata Steel 1.94%.
Sesa Sterlite 1.78%, Sun Pharma 1.49%, HDFC 1.35% and Infosys 1.2% also rose smartly.
Commenting on the RBI policy, Arvind Sethi, managing director and CEO, Tata Asset Management said: "The tone of the policy reaffirmed the RBI's commitment to squeeze out inflation and inflationary expectations, and that was very reassuring".
Among the S&P BSE sectoral indices, Realty rose by 2.65% followed by Auto 2.11% and Metal 1.33%.
Small-cap and Mid-cap indices also firmed up by 1.12% and 0.82% respectively on sustained demand from retail investors.
Market breadth remained positive as 1,778 stocks closed with gains while 1,142 ended with losses. Total turnover rose to Rs 2,991.33 crore from Rs 2,430.53 crore on Monday.