Brokers said softening of inflation has sparked off hope that the Reserve Bank will cut interest rate at its policy review next month.
While retail inflation in June touched its lowest mark at 7.31 per cent since January 2012, the wholesale price based index slid to four-month low of 5.43 per cent mainly because of easing prices of vegetables.
Value-based buying in many blue-chip stocks, which became attractive after recent losses, also helped the the barometer to close higher, brokers said.
The 30-share Sensex gained 221.67 points, or 0.89 per cent, to end the day at 25,228.65.
The surge comes for index comes after losing 1,093 points in the previous five sessions.
The broad-based National Stock Exchange index Nifty reclaimed the 7,500-mark by jumping 72.50 points, or 0.97 per cent, at 7,526.65.
Firm Asian markets, mixed European opening and record closing on US markets yesterday on better-than-expected earnings by Citigroup also helped boost investor sentiment in domestic market.
Major gainers were BHEL at 4.31 per cent, SBI 4.43 per cent, L&T 2.21 per cent, Mahindra and Mahindra 2.59 per cent, Axis Bank 2.89 per cent, Coal India 1.52 per cent, GAIL 1.28 per cent, ONGC 2.49 per cent, Reliance Industries (RIL) 1.20 per cent, ICICI Bank 3.33 per cent, Tata Steel 2.92 per cent and Tata Motors 1.37 per cent.
Consumer durables index outshined other sectors. The BSE consumer durables sector index gained the most by rising 2.84 per cent, followed by banking sector index (up 2.64 per cent, PSU index (2.42 per cent), capital goods index (2.30 per cent), realty index (2.37 per cent), metal index (1.33 per cent) and oil and gas index (1.64 per cent).
FMCG and IT sector index, however, ended in the negative territory.
The mid cap index also turned active with buying seen in several of its constituents. Midcap index up 2.06 per cent and smallcap up 2.279 per cent.
Shrikant Chouhan, Head- Technical Research, Kotak Securities: The market opened up with a gap but failed to perform in the first part. However in the second half Sensex recovered on the back of strong recovery in PSU banks and it closed at the days highest 25254. The leader ship was mainly from index component primarily from SBI, BOB, AXIS, ICICI and Reliance. Weakness was mainly from defensive sectors especially FMCG and Pharmaceuticals. Number of mid cap stocks did well and most of them were into upper freeze of 5%. Breadth improved almost after 6 trading sessions. We are of the view that even though the market recovered it seems that its a pull back to the recent sell off between 26190 and 24890. The Sensex will face major hurdles between 25370 and 25530. Our advice is to reduce weak long positions at major resistance levels and add on to strong bets on dips. On the down side it has support at 25190 and at 25090. Be a buyer in core economy related stocks on dips.