The 30-share index BSE Sensex, which had gained 142 points in the previous session, advanced by 46.07 points, or 0.22 per cent, to close at 21,251.12 points. It touched a day's high of 21,302.52 points.
The broad-based NSE Nifty rose by 9.85 points, or 0.16 per cent, to 6,313.80 points.
Brokers said market sentiment improved after government decided to sell stake in Hindustan Zinc Ltd which might narrow down budget deficit.
Shares of Hindustan Zinc rose 0.15 per cent to Rs 135.20 after the Cabinet Committee on Economic Affairs approved the sale of the government's residual stake.
They said the upsurge was backed by banking and interest rate sensitive stocks on expectations that RBI may keep its policy rates unchanged in its review meeting on January 28 as headline inflation has receded.
A firming trend in global stock markets also influenced the market sentiment to some extent, they added.
Among 30 BSE Sensex components, 15 stocks closed with gains.
The banking sector index gained the most rising by 1.55 per cent to 12,769.51, followed by the auto index which rose by 1.03 per cent to 12,239.74. Metal index rose by 0.77 per cent to 9,732.54 and capital goods index by 0.64 per cent to 9,761.91.
BSE Sensex ends higher, Tata Motors, ICICI Bank share prices extend gains
(Reuters) Indian shares edged up on Tuesday as interest rate-sensitive companies such as Tata Motors and ICICI Bank extended recent gains amid rising expectations that the central bank will keep monetary policy unchanged next week.
Engineering giant Larsen & Toubro Ltd rose ahead of its earnings on Wednesday as investors remain focused on results, while Hindustan Zinc Ltd gained after the government approved a sale of its stake in the company.
However, broader gains were limited as investors booked profits in recently rallying software services exporters such as Tata Consultancy Services Ltd.
"Markets are likely to trade rangebound and stock-specific with a positive bias. Inflation is under control and we expect positive steps from the central bank," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.
"Banking stocks will continue to do well while other interest-specific sectors such as auto and real estate would also see some buying interest ahead of the policy."
The benchmark BSE index closed up 0.22 percent at 21,251.12, while the broader NSE index ended higher 0.16 percent at 6,313.80.
Overseas investors bought Indian shares worth 3.85 billion rupees on Monday, provisional exchange data showed. Foreign institutional investors have been buyers for eight consecutive sessions to the tune of 24.06 billion rupees.
Banks were among the leading gainers, with State Bank of India up 1.08 percent and ICICI Bank ending higher 3.26 percent.
The Reserve Bank of India is due to hold its policy review on Jan. 28 amid strong expectations that it will keep interest rates on hold for a second consecutive month after inflation eased lat month. The RBI had raised interest rates by a total of 50 basis points over September and October.
Shares in Hindustan Zinc Ltd rose 1.43 percent after the government approved on Monday the sale of its shares in the metal company. The government holds a 29.5 percent stake in the company.
However, software services exporters fell with Tata Consultancy Services down 2.48 percent after gaining 5.3 percent on Monday, its biggest single-day gain since April 2012, as investors took profits.
Asian Paints fell 2.19 percent after the company's net profit for the October-December quarter fell 1.75 percent, disappointing some investors.
* BSE index gains 0.22 pct; NSE up 0.16 pct
* Banks, interest rate-sensitive stocks gain
* IT stocks fall on profit-taking
FACTORS TO WATCH
* Euro falls versus dollar after German ZEW
* Oil rises over $107, IEA says demand to outstrip supply
* European shares hit 5-1/2 yr high, dollar gains
* Foreign institutional investor flows