Building up on yesterday's 359-point rally following the RBI policy, the Sensex surged 104.96 points, or 0.5 per cent, to 21,033.97. The highest close previously was 21,004.96 on November 5, 2010, while the intra-day record high was 21,206.77, which was hit on January 10, 2008.
Hectic short covering ahead of the expiry of futures and options October contracts tomorrow, along with foreign capital inflows and higher global cues pushed the index higher.
All but two of the 13 sectoral indices advanced, led by healthcare, FMCG, teck and power stocks.
"The festive season seems to be getting better and better," said Amar Ambani, Head of Research, at India Infoline. "The momentum continued for the second straight day post RBI's decision of cutting the marginal standing facility rate bringing cheer on Dalal Street."
The 50-share CNX Nifty on the National Stock Exchange rose 30.80 points, or 0.5 per cent, to 6,251.70. The SX40 on the MCX Stock Exchange closed up 69.68 points at 12,514.81.
Foreign institutional investors continued their buying spree and invested a net Rs 1,103.04 crore in shares yesterday, according to provisional data from the stock exchanges. Overseas funds are investing in emerging markets as the Fed continues its USD 85 billion bond-buying programme every month.
Asian stocks ended higher on rising company earnings and expectations the Federal Reserve will maintain the pace of its monetary stimulus. Key indices in China, Japan, Hong Kong, Taiwan, Singapore and South Korea rose.
Indices in France, Germany and the UK also moved up, while there were indications of a higher opening in US index futures.
Among the 30 Sensex shares, 17 stocks gained, led by Bharti Airtel (5.23 pc), Dr Reddys Laboratories (3.87 pc), Hindalco Industries (2.77 pc), ICICI Bank (2.23 pc) and Bharat Heavy Electricals Ltd (BHEL) (2.09 pc).
The market breadth remained positive as 1,259 stocks closed higher while 1,185 shares finished lower.
Among the S&P BSE sectoral indices, healthcare rose 1.19 pc, followed by FMCG 1.12 pc, teck 0.66 pc and power 0.51 pc.
The mid-cap and small-cap indices were also quoted higher by 0.25 pc and 0.64 per cent, respectively.
Total turnover on the BSE fell to Rs 1,951.05 crore from Rs 2,243.47 crore yesterday.