Later in the day, the government managed to win the FDI vote in Parliament.
Led by Reliance Industries, the Sensex settled the day at 19,391.86, higher by 43.74 points, or 0.23% the highest closing since 19,448.69 on April 27, 2011.
The broad-based National Stock Exchange index Nifty regained the 5,900 level by rising 11,25 points, or 0.19%, to 5,900.50.
Expectations are building up that the way government has handled the FDI issue, it will be able to push through more Bills in Parliament once it secures the vote on retail, said Rikesh Parikh, vice-president, equities, Motilal Oswal Securities.
Heavyweights, including ITC, HDFC Bank, RIL, SBI, Sterlite, Tata Motors, Tata Steel and Hindalco, attracted buying in Sensex. However, Infosys, Tata Power, HDFC, Bajaj Auto and M&M closed with losses in the 30-share Sensex.
A weaker dollar, strong FII investments and overall bullish sentiments are helping markets to inch up higher, said Milan Bavishi, head, research, Inventure Growth & Securities.
Overall in the broader market, shares of realty and metal sectors firmed up, while scrips from the IT sector suffered losses. Analysts said a softer dollar kept pressure on the performance of IT stock prices.
Globally, Chinese stocks jumped to lead gains for the Asian markets. European markets were trading higher in their afternoon trade.
In Asia, the Shanghai Composite ended 2.87% higher. Key benchmark indices in Hong Kong, Singapore, South Korea, Japan and Taiwan finished higher between 0.39% and 2.16%.
European markets were trading higher in their afternoon trade as investors picked up banks and resource shares. Key benchmark indices in UK, Germany and France moved between 0.49% and 0.58%.
Back home, 15 out of 30 Sensex-based counters closed with gains, while others finished with losses. Sterlite was the top gainer with a rise of 5.37%, followed by Hindalco (3.38%), Tata Steel (2.13%), SBI (1.38%), Tata Motors (1.33%), HDFC Bank (1.12 %), ITC (1.03%), Hero MotoCorp (0.87%), RIL (0.87%) and ONGC (0.81%).