The Sensex surged more than 200 points and Nifty also ended higher on Monday after two days of losses as software services exporters such as Infosys (INFY.NS) rallied on a weaker rupee while lenders gained a day before the RBI's policy review.
However, sentiment remained broadly cautious after foreign investors sold a net $175.73 million worth of shares on Friday, the third straight session of net sales that totalled $494.7 million.
Investors will be closely eyeing the Reserve Bank of India's policy review on Tuesday. The central bank is widely expected to keep interest rates on hold, but analyst say it may loosen tight cash conditions by easing mandatory bond requirements for lenders among other potential measures.
Global factors will also be critical after sharp falls late last week. In India, the Nifty fell 2.4 percent over the previous two sessions to end on Friday at its lowest close since July 15.
"Symptoms are all positive only. But everything depends on the RBI policy, which will pave the direction for the short-term. Outlooks remains firm and it's still a buy-in-dips market," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.
The broader Nifty ended up 1.07 percent at 7,683.65, while the Sensex gained 0.95 percent to 25,723.16.
Shares in software services exporters gained after the rupee last week posted its biggest weekly fall since record low levels in August last year.
The local currency rebounded slightly on Monday but was still trading weaker than 61 per dollar.
Infosys shares rose 3.72 percent, marking their biggest single-day gain since June 11. Wipro Ltd (WIPR.NS) gained 2.4 percent, Tech Mahindra Ltd (TEML.NS) added 1.9 percent and HCL Technologies Ltd (HCLT.NS) ended 2.6 percent higher.
Lenders gained on hopes the RBI would announce measures to ease tight liquidity conditions and take action to help spur lending. State Bank of India ended up 1 percent, while ICICI Bank Ltd (ICBK.NS) closed 1.1 percent higher.
Upstream oil and gas companies also gained, with Indian Oil Corporation (IOC.NS) up 4.4 percent and Bharat Petroleum Corp Ltd (BPCL.NS) higher 4 percent, as brent crude fell to its lowest settlement since April 2 on Friday.
Shares in tyre makers gained as traders noted rubber prices hovered near their lowest levels in 4-1/2 years. Apollo Tyre Ltd (APLO.NS) ended 5.3 percent higher, while JK Tyre and Industries Ltd (JKIN.NS) closed up 5.6 percent.
Auto companies also rose after reporting robust sales numbers for the month of July. Maruti Suzuki India Ltd (MRTI.NS) ended 2.3 percent higher, while Mahindra & Mahindra Ltd (MAHM.NS) added 1 percent.
However, among decliners, Syndicate Bank (SBNK.NS) ended 6.9 percent lower after its chairman was arrested over allegations of taking bribes to grant loan extensions to a company.
(Reporting by Indulal PM; Editing by Subhranshu Sahu)
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