Continued foreign fund inflows pushed shares 0.4 percent higher on Monday, amid firm global markets, with Reliance Industries and metal producers leading the gainers.
Shares have been a hot favourite among global investors shovelling more cash into emerging markets following the dollar's weakness and expectations of a fresh dose of U.S. quantitative easing.
Foreign fund inflows into equities have topped $21 billion so far in 2010, driving the main stock index 16.5 percent higher.
Data from Nomura showed foreign funds have pumped $2.7 billion into equities in the week ended Oct 8, and Asia's third-largest economy was the preferred destination among its regional peers.
The 30-share BSE's Sensex firmed 0.44 percent or 89.63 points to 20,339.89, with 18 of its components advancing. It rose as much as 1 percent in early trade and is only around 900 points short of its record high touched in January 2008.
Nearly two shares gained for every share that declined in the broader market, in a volume of 498 million shares. The 50-share NSE index rose 0.5 percent to 6,135.85 points.
"While the undertone stays bullish considering the huge liquidity flow, there is an element of caution as we move higher," said Prakash Diwan, head of institutional business at Networth Stock Broking.
"There is strong support for Nifty at 6,030 (points). Earnings should provide more cues."
Dealers said market will eye the August industrial output data due on Tuesday, apart from the quarterly earnings numbers which would start trickling in this week for directional cues.
According to a Reuters forecast, annual industrial output growth in the world's second-fastest growing major economy, probably slowed down to 9.65 percent in August from 13.8 percent in the previous month.
Brokerage Anand Rathi said the 50-share Nifty companies were likely to see a profit growth of 20 percent in the September quarter.
It said the quarterly profit growth would be led by materials, industrials, autos, consumer discretionaries and staples, while telecom and healthcare would be the key laggards.
Energy major Reliance Industries, which has the highest weight on the Sensex, rose nearly 2 percent, as it sought to catch up with the broader market.
The stock is down 1.9 percent so far this year. Metal makers rose after base metal prices rallied in Shanghai and London on hopes of more stimulus from the U.S. Federal Reserve.
Non-ferrous metals producer Sterlite Industries <STRL.BO> and aluminium producer Hindalco rose 3.1 percent and 0.3 percent respectively.
Tata Steel, the world's seventh-largest producer of the alloy, climbed 2.1 percent,
Cairn India erased some early gains to close 2.1 percent higher after Vedanta Resources said on Monday the open offer price for the Indian explorer's minority shareholders is indeed the final price.
Earlier in the day, the stock had risen as much as 5.4 percent after the Business Standard newspaper reported India-focused miner Vedanta Resources which is bidding for the energy explorer, was likely to raise the open offer price for the minority shareholders.
World stocks were firm as Friday's weaker-than-expected U.S. jobs data reinforced hopes that the Federal Reserve would inject fresh money into the economy.
MSCI world equity index was up 0.2 percent by 1033 GMT, while the more volatile emerging markets index <.MSCIEF> gained 0.5 percent.
STOCKS THAT MOVED
Nirma rose as much as 18 percent to 264.85 rupees, after the detergent maker said it has approved a proposal by the founders to acquire all outstanding shares at 235 rupees per share and delist from the BSE and the NSE. The stock gave up some early gains and closed 7.2 percent higher at 240.50 rupees.
Bharat Forge climbed 3.3 percent to 381.40 rupees, after the Mint reported on the weekend that the firm's joint venture with Paris-based Alstom SA had emerged as the lowest bidder for the largest order for supply of power generation equipment in India.
Prime Focus rose 2.2 percent to 705.05 rupees, after a top official said he expects a 15-20 percent jump in revenue in the current financial year driven by plum 2-D to 3-D film conversion and visual effects contracts.
CMC firmed 17.9 percent to 2,375.70 rupees, after the company said its July-September net profit rose 18.08 percent.