Markets traded on a firm note through the day and ended near the day's high.
The Sensex gained 243 points to 19,906. NSE benchmark Nifty was up 72 points at 6024 as investors cheered the lower than expected inflation figures.
The headline inflation slowed down to its lowest level in three years, hardening expectations for an interest rate cut by the RBI later this month to boost an economy that is set to post its slowest growth in a decade.
The annual wholesale price inflation eased to 7.18% in December, government data showed on Monday.
It was below analysts' expectations of 7.40% and down from 7.24% annual rise in November.
Meanwhile in Asia, Chinese stocks surged 3% to 2,312 after a regulator said the country will grant foreigners greater access to its stock markets, with financials fronting the rally.
Hang Seng, Nikkei and Kospi also went up substantially.
Rate sensitive sectors were among the top gainers on hopes that easing inflation would help the central bank to cut rates at its policy meet during the end of the month.
BSE realty index surged 5% to 2252. IT index went up 2.5% at 6,413, still riding on the good numbers posted by bellweather - Infosys. However, BSE auto index shed 0.5% at 11,579.
TCS was up over 2% at Rs 1,334 ahead of its third quarter earnings to be release after market hours on Monday.
"We belive TCS would find it difficult to move above 1370 kind of levels, also looking at options data not much big movement is expected on TCS counter after the resutls.
should look to book profits near 1370 levels," said Navneet Daga, derivative analyst, KR Choksey Securities.
Infosys extended gains on Monday and was up over 3.4% at Rs 2,807 after the company on Friday surprised the street with better-than-expected results for the third quarter ended December 2012 (Q3) and also raised its full year guidance.
JPMorgan and Barclays Capital upgraded their ratings on Infosys to "overweight", citing an expected improvement in earnings after the software services exporter posted better-than-expected results and revenue outlook on Friday.
Metal shares -- Jindal Steel, Tata Steel and Hindalco added 1-3% each. ONGC was up 4.2% in spite of the news of CLSA downgrading the company to "underperform" from "outperform". The brokerage also cut IOC and HPCL to "sell" from "underperform".
Among other gainers were ICICI Bank and larsen & Toubro.
FMCG majors -- ITC and HUL added around 1.5% each.
The overhang of the Open Interest on the FMGC has been continuing its momentum on the short side with no significant signs of covering being noticed.
Hence, longs on FMCG are best to be avoided with a short-term perspective," said Karun Mutha, senior vice-president and chief market strategist, HSBC Invest Direct Securities.
On the other hand, Maruti Suzuki slipped 1.7% at Rs 1,539. Cipla, Bajaj Auto and Coal India shed around 1% each. Among them, Bajaj Auto comes out with quarterly numbers on Wednesday.
Tata Motors has undertaken a three-day block closure at its Jamshedpur plant from today to align production with demand.
The block closure in the Jamshedpur plant is the second in a fortnight. The stock slipped 0.6% at Rs 328.
BSE market breadth was fairly positive. Out of 3,007 stocks traded, 1,368 shares advanced while 846 shares declined in trades.