Domestic stocks took on more strength on positive cues from Europe as the benchmark Sensex rallied nearly 102 points to hit a three-week high of 28,179 on Monday ahead of a crucial meeting between the government and top management of banks on NPAs.
But caution set in after some key banks are due to announce their earnings from tomorrow onwards.
The global markets ruled higher on expectations that China will unveil fresh economy-boosting measures.
Buying across the board led by oil and gas, banks and auto stocks carried forward the momentum.
The 30-share index opened higher and settled at 28,179.08, a gain of 101.90 points, or 0.36%.
The gauge had lost 53 points on Friday due to heightened prospects of a US rate hike.
The NSE Nifty closed up 15.90 points, or 0.18%, at 8,708.95.
"Early sluggishness was wiped off on positive cues from European markets and after PSU banks added further gains ahead of a meeting of senior management of banks today to discuss the bad loans issue in specific sectors, including steel, power and infrastructure," said Anand James, chief market strategist, Geojit BNP Paribas Financial Services.
Buying picked up here after Asian shares climbed to two-week highs and European shares advanced in their early deals as investors focused on fresh economic data and corporate earnings, brokers said.
According to global financial services major American Merrill Lynch, there is room for a 50 bps rate cut by the Reserve Bank over the next few months, with 25 bps each likely in February and April.
Investors remained cautious ahead of a key week for quarterly results for companies such as HDFC Bank, Axis Bank and a few more.
Stocks of automakers evoked good buying support on hopes of pick-up in demand during the festive and wedding season.
State-owned ONGC emerged as the star performer and closed up by 4.61% after the company said its board will on Thursday consider issuing a bonus share to increase liquidity ahead of government disinvestment.
Other big gainers were Tata Motors, ICICI Bank, Coal India, Lupin, SBI, HDFC, Maruti Suzuki and M&M, rising by up to 2.67%.
Foreign portfolio investors net sold shares worth Rs 272.91 crore last Friday, provisional data showed. The BSE oil and gas index jumped the most by gaining 1.67%, followed by PSU (1.54%), auto (0.84%), banking (0.60%) and metal (0.20%).
The broader market offered a mixed trend, with BSE small-cap up 0.52% and mid-cap shedding 0.13%.
Asian stocks ended higher as China's Shanghai Composite climbed 1.21% to the highest close since January 8 amid optimism that the government will boost infrastructure spend and speed up overhaul of state-owned companies.
Hong Kong's Hang Seng was up 0.98% and Japan's Nikkei 0.29%. Key indices in Europe like France CAC, Germany's DAX and the UK's FTSE all firmed up.