Markets ended higher on Tuesday, amid a volatile trading session, led by Bharti Airtel and recovery in rate sensitive shares on hopes that the central bank would ease key interest rates at its next policy meet in January.
Earlier, markets had opened marginally higher ahead of the policy announcement but fell sharply after the Reserve Bank of India kept key policy rates and the cash reserve ratio unchanged.
Later, markets rebounded from their intra-day lows led by Bharti Airtel and recovery in bank shares.
The Sensex ended higher by 120 points at 19,365 and the 50-share Nifty ended higher by 39 points at 5,897.
The Sensex touched the intra-day high of 19,396 and low of 19,149. While, the Nifty touched an intra-day high of 5,906 and the low of 5,823.
Meanwhile, most of the Asian markets ended on a positive note as signs of compromise sparked new optimism that the US "fiscal cliff" budget tussle could be settled before tax hikes and spending cuts begin to bite early next year.
Differences over how to resolve the fiscal cliff narrowed significantly Monday night as President Barack Obama made a counter-offer to Republicans that included a major change in position on tax hikes for the wealthy, according to a source familiar with the talks.
Shanghai Composite advanced 2 points to end at 2,162, Nikkei jumped 94 points to end at 9,923, Straits Times gained 5 points to close at 3,163 and the Seoul Composite index closed higher by 10 points at 1,993.
While, the Hang Seng succumbed to the profit booking and closed weaker by 19 points at 22,494.
The European markets have also opened on a positive note tracking gains overnight on Wall Street fuelled by expectation that U.S. politicians were close to a deal to avoid steep tax hikes and spending cuts that threaten the global economy.
CAC, DAX and FTSE were up 0.2-0.4% each.
Back home, the RBI kept the Cash Reserve Ratio (CRR), Repo rate and SLR unchanged. Repo rate was unchanged at 8%. CRR has been kept unchanged at 4.25%.
Reverse Repo Rates has been kept unchanged at 7%.
Bharti Airtel ended higher by 4.2% at Rs 313 after the stock recently corrected following the luke warm response from retail investors for the 4,500-crore
From the capital goods space, L&T ended higher by 1.3% and BHEL was closed higher by 4% after the stock recently corrected from Rs 340 levels.
Metal stocks such as Tata Steel, Hindalco, jindal Steel, Sterlite Industries and Coal India advanced up to 3% each, extending their past two days gain after a preliminary version of HSBC's China manufacturing purchasing managers' index (PMI) hit a 14-month high in December 2012.
Sun Pharma, Wipro, HDFC, Tata Motors, State Bankl of India, Cipla, Hero MotoCorp, Mahindra & Mahindra, NTPC and ICICI Bank also closed on a positive note up 0.6-2.6% each.
On the other hand, Maruti Suzuki, ONGC, Dr Reddys Labs, Bajaj Auto, Reliance Industries and HDFC Bank were among the notable laggards.
All the sectoral indices barring the BSE oil & gas index ended on a positive note. The BSE realty index was the top sectoral gainer. The index advanced 2.4% to end at 2,120.
Metal, capital goods, teck, power, consumer durables, healthcare and PSU indices also closed on higher by 0.6-1.8% each.
Shares of interest-rate sensitive sectors bounced back from intra-day lows and ended higher by up to 6% after the Reserve Bank of India's (RBI) said it expects inflation pressure to ease in the next few months, raising the hopes of a rate cut as early as January.
Liberty Phosphate slumped 10% to Rs 175, extending its previous day's about 10% fall, after the company denied a news report stating that Coromandel International plans to acquire the company.
Jaiprakash Power Ventures dipped 7% to Rs 38.70 on back of huge volumes on reports that promoter sold stake in the company.
A combined 18.11 million shares have changed hands on the BSE and NSE.