The Sensex gained 729 points to record its highest single-day gain since May 18, 2009, led by financials on expectations that further easing of interest rates would help spur growth.
The 30-share Sensex jumped 729 points to end at 28,076 and the 50-share Nifty soared 217 points to end at 8,494.
The Reserve Bank of India in a surprise move before market hours today cut the repo rate by 25 basis points to 7.75% with immediate effect.
One basis point is one-hundredth of a percentage point.This is the first repo rate cut since May 2013.
The RBI kept the CRR unchanged at 4%.
"We believe that this is a beginning of a big rate cut cycle. We expect a further 125 bps over the next 12 months, cumulative 150bps in this cycle (compared with our earlier forecast of 50bps rate cuts).
"Our rate cut forecast is predicated on our view that CPI inflation will stay at closer to 5% in most of the calendar year 2015, as the reduction in fiscal deficit, sustained deceleration in rural wages and lower global commodity prices will mean that inflationary pressures in the economy will be contained," Morgan Stanley India said in a note today.
The move, which had been widely anticipated by economists, comes after WPI inflation for December came in at 0.11%, marginally higher than the flat inflation logged in Novemeber.
"Inflation outcomes have fallen significantly below the 8% targeted by January 2015.
"On current policy settings, inflation is likely to be below 6% by January 2016.
"These developments have provided headroom for a shift in the monetary policy stance," RBI governor Raghuram Rajan said in a statement.
RBI has said availability of key inputs like power and land will be needed to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation.
The other area that the central bank would be expecting from the budget is the formation of a new monetary policy framework, in line with the recommendations of the Urjit Patel committee, which was formed to revise and strengthen the monetary policy.
Meanwhile, foreign institutional investors were net sellers in Indian equities worth Rs 69.74 crore on Wednesday, as per provisional stock exchange data.
All the sectoral indices ended in the green with rate sensitive leading the gains and BSE Realty emerging as the top sectoral gainer up 8% followed by Bankex, Capital Goods and Auto among others.
The BSE Bankex hit a record high of 22,260 and the NSE Bank Nifty hit a record high of 19,410.
"The RBI rate cut is a turning point for the markets and it is going to be a mood booster.
"Foreign funds can increase their asset allocation for India considering the positive developments.
"Domestic institutional investors are also likely to be major buyers.
"However, in this volatile world it will be a good idea to balance one’s portfolio with defensives and cyclicals.
"I believe auto and banking stocks must be included with higher weightage.
"In 3-5 year horizon I see markets doing well if the expected economic recovery happens." said Nirmal Jain, Chairman IIFL.
Financial shares were among the top gainers led by mortgage lender HDFC up nearly 7% followed by banks such as ICICI Bank, HDFC Bank, SBI and Axis Bank among others.
Auto stocks gained on hopes that lower rates on car loans would boost sales growth in the fourth quarter.
M&M gained nearly 3% followed by Maruti Suzuki, Tata Motors, Bajaj Auto and Hero MotoCorp.
In the realty space, Housing Development and Infrastructure (HDIL), Perstige, Indiabulls Real Estate, Unitech, DLF, Godrej Properties and Sobha rallied between 4-18%.
Capital Goods stocks ended higher on expectation of order inflows from power producers.
L&T rose nearly 4% and BHEL ended up 0.3% after bagging an Rs 1,202 crore order for 370 MW gas-based combined cycle power project.
Among index heavyweights, RIL has gained 3.5% and ITC ended up 2.8% on reports it is planning to set up a biscuits and confectionary manufacturing plant in Odisha with an investment of around Rs 440 crore.
However, Hindustan Unilever was the sole Sensex loser down 0.2% after sharp gains in the previous few sessions.
Coal India gained over 1%. According to media reports, CIL is in talks with Australian companies to access the technologies necessary for mining the coal trapped in loss-making mines.
IT shares ended with marginal gains following the sharp appreciation in the rupee. Infosys was up 0.2% and Wipro gained 1.3% while TCS gained over 1% ahead of its third quarter earnings later today.
In the broader market, the BSE Mid-cap gained 1.2% and Small-cap index ended up 1%.
Market breadth ended strong with 1,719 gainers and 1,175 losers on the BSE.
