The Sensex rose 194.75 points (1.18%) to end at 16,649.05 points. The broader 50-share Nifty rose 52.55 ponits (1.05%), to close at 5,049.65 points.
Banks such as ICICI Bank extended a rally on hopes the Reserve Bank of India would cut interest rates on June 18, at a time when global investors are betting the Federal Reserve will ease monetary conditions for the US economy. In a surprise move, China cut benchmark interest rates by 25 basis points to shore up slackening economic growth. The action came after the close of Indian stock markets.
Auto makers, which stand to benefit from lower domestic interest rates, gained on Thursday, getting an additional boost from optimism the government will decide not to raise excise duties on diesel vehicle sales.
Still, India is seen facing steep fiscal and economic challenges, and some analysts doubt how much longer domestic equities can rally after posting their longest winning streak since early February.
The stance from foreign investors could be key. Foreign institutional investors net bought R169 crore in equities on Wednesday, turning buyers for the first time in five sessions, but remain net sellers of R1,808 crore so far in June, indicating they have sold into the rally.
The rally is primarily driven from global market rally and improved sentiment, oil price coming down, and possibility of rate reduction by RBI has helped, said CJ George, managing director at Geojit BNP Paribas.
Key benchmark indices in Hong Kong, Japan, South Korea and Taiwan rose by between 0.34% to 2.56% while China's Shanghai Composite and Singapore's Straits Times fell by 0.06% and 0.71%. European stocks erased some of its early gains but still traded higher in their afternoon deals. The Stoxx 600 gained 1.5% to 243.42 at 1:01 p.m. in London.