Markets reversed early losses to rebound in late trades on Thursday, amid firm European cues, led by engineering major L&T and software major Infosys.
The Sensex gained 174 points to end at 18,805. Nifty ended up 56 points at 5,708.
Asian shares ended lower on Thursday after Standard & Poor's cut Spain's rating two notches to BBB- minus, one step from junk status, late on Wednesday, warning that an intensifying recession and poor response from euro zone policymakers to the crisis had left Spain highly vulnerable.
The Nikkei, Shanghai Composite and Straits Times ended down 0.04-0.8%. However, Hang Seng ended up 0.4%.
Further, European shares staged a recovery after opening lower follwowing Spain's downgrade.
The FTSE-100, CAC-40 and DAX were all trading higher by 0.5-0.7% each.
Meanwhile, the IMF prodded Europe and the United States to act faster to resolve their debt troubles, blaming plodding progress for creating economic uncertainty and slowing global growth.
Christine Lagarde, the head of the International Monetary Fund, said she expected "courageous and cooperative action" as she laid blame on Europe and the United States for fostering a sense of unease that has led companies to delay investment and hiring.
The broader markets gained in line with the benchmark index.
The BSE Mid-cap index up 1.3% while Small-cap index was up 1%.
According to provisional data, foreign institutional investors (FIIs) remained buyers of Indian stocks on Wednesday.
All the sectoral indices traded in the green. BSE realty index added 4.5% at 1,885. Capital goods, IT and [pwer shares advanced 1.5-2% each.
Realty and power shares witnessed buying at lower levels after they witnessed a sharp sell off in the previous sessions.
Tata Power and NTPC were up 0.6-1.5% each.
In the realty space DLF was up 4% at Rs 221. Meanwhile, Goldman Sachs downgraded DLF to 'neutral' from 'buy', saying slower approvals could result in fewer project launches, while cutting its pre-sale estimates for India's largest property developer.
Auto shares were down after the Society of Indian Automobile Manfacturers Wednesday said, car sales in India are seen growing just 1-3% in the financial year that ends in March 2013, as it slashed its previous estimate of 9-11% on high interest rates and slowing economic growth.
Maruti Suzuki, Mahindra & Mahindra were the key losers - down 1% each.
Two-wheeler makers Hero MotoCorp and Bajaj Auto ended flat after a foreign brokerage downgraded both of them. CLSA has downgraded Bajaj Auto to 'sell' from 'underperform', while maintaining its 'sell' rating on Hero MotoCorp, citing weak demand growth, a consumer shift to scooters over motorcycles, and rising competition.
Infosys was up 1.5% at Rs 2,542 ahead of its results on Friday.
The street consensus for the dollar revenue growth of the IT major is between 3.5-4%. HDFC Bank, which also comes out with results tomorrow, is up 1% at Rs 624.
Index heavyweight Reliance Industries was flat at Rs 820 on profit taking after recent gains.
Among other shares, shares of fertilizer companies such as Rashtriya Chemicals and Fertilizers (RCF), National Fertilizer, Deepak Fertilizers, Chambal Fertilizers, National Fertilizers and GNFC rallied 1-4% each on reports that Cabinet clears direct urea subsidy transfer and mobile fertilizer management system.
The Cabinet also approves hike in urea prices by Rs 50 per tonne.
Select cement stocks edged higher on hopes construction activity will pick up as the southwest monsoon has started withdrawning from the country. ACC jumped 1.7% and Shree Cement edged up 1% in trades today.
BSE market breadth was weak with 1,180 losers and 1,653 gainers.