The benchmark Sensex erased early losses and surged 266 points to close above the 20,000 mark for the first time in almost three weeks after the latest trade data indicated the government's efforts to rein in the current account deficit are working.
Realty sector shares rose sharply, followed by healthcare, bank and capital goods stocks as 12 of the 13 BSE industry groups advanced.
Heavyweights Infosys and Reliance Industries, along with HDFC Bank and Sun Pharma, helped to prop up the Sensex.
The 30-share S&P BSE Sensex initially dropped to a low of 19,826.96 after Reserve Bank of India Governor Raghuram Rajan said the monetary policy should aim at lowering inflation expectations.
Sentiment was also hit after the International Monetary Fund forecast India's economic growth rate would fall to 4.25% in the year ending March 31, 2014.
The Sensex bounced back after the trade data was released and ended at 20,249.26, a rise of 265.65 points or 1.33%. It was the highest close for the index since 20,263.71 on September 20.
The government said the trade deficit in September narrowed to a 30-month low as gold and silver imports plunged.
While exports grew 11.15 %, imports declined 18.1% last month.
"The trade deficit for September came to a more than two-year low at $ 6.7 billion. This can be beneficial for the Indian currency as well as controlling the current account deficit," said Rakesh Goyal, senior vice president at Bonanza Portfolio Ltd. "Financial and banking stocks recovered from lower levels and showed strength after this news. Positive economic data and optimism ahead of quarterly results have led to this rally."
The 50-share CNX Nifty on the National Stock Exchange shot up 79.05 points, or 1.33%, to 6,007.45. The SX40 index on the MCX Stock Exchange gained 151.11 points to end at 12,055.73.
Foreign institutional investors bought a net Rs 226.32 crore of shares yesterday, according to provisional data from the stock exchanges.
Asian stock markets closed mixed as the stalemate in the US increased concerns about the world's largest economy breaching the federal debt ceiling. Key indices in China, Japan, Singapore and South Korea gained, while they fell in Hong Kong and Taiwan. European stock indices were mixed.
In the local market, 25 Sensex shares advanced, led by Sun Pharma (5.09%), HDFC Bank (2.57%), Infosys (2.48%), BHEL (2.25%) and Tata Steel (2.09%). Losers included Wipro, which dropped 1.19% and Sesa Sterlite 1.05%.
Among the sectoral indices, S&P BSE Realty rose 4.27%, followed by S&P BSE Healthcare 1.88%, S&P BSE Bankex 1.88 %, S&P BSE-Capital Goods 1.86% and S&P BSE Power 1.57%.
The market breadth remained positive as 1,403 shares finished with gains while 1,025 ended with losses.
Total turnover moved up to Rs 1,815.17 crore from Rs 1,801.79 crore yesterday.