Markets surged in late trades and ended with strong gains owing to short-covering in select stocks on account of derivatives expiry for the October series.
The Sensex, after a firm opening, slipped to a low of 16,900 post RBI's policy review.
However, markets took it in its stride and rebounded smartly to a high of 17,322.
The index finally ended up 316 points at 17,255. Nifty gained 93 points to 5,192.
The Reserve Bank of India on Tuesday raised repo rate, the rate at which it lends to banks, by 25 basis points to 8.5%.
However, the cash reserve ratio remains unchanged at 6% and reverse repo rate too is unchanged at 7.5%. RBI has brought down the GDP forecast from 8% to 7.6%, while retaining the inflation forecast of 7%.
The central bank has also deregulated the bank deposit (savings) rates with immediate effect, subject to certain conditions.
This is likely to push up cost of funds, effecting bank stocks negatively.
The RBI has stipulated that each bank will have to offer an uniform rate of interest on savings bank deposits up to Rs one lakh. Above that, it may provide differential rates of interest.
""It looks like we have now reached peak of the interest rate cycle and once inflation starts decelerating, we can expect the policy stance to shift towards addressing growth concerns," said Ashutosh Datar, IIFL.
Markets will have a special
It will remain closed on Thursday on account of Diwali.
Elsewhere in Asia, markets ended mixed ahead of Wednesday's crucial statement on Europe's plans to stem its debt crisis. The Hang Seng gained 1% at 18,968 and Shanghai Composite has jumped 1.6% to 2,409.
The BSE IT index held on to gains and finally ended up over 3% at 5,815.
The auto index managed to recover from its lows and ended up 3% at 9,280.
However, the bankex languished after Reserve Bank of India deregulated saving rates.
BSE bankex slipped 0.7% to 10,978.
Most stocks recovered from the red. Banking names like HDFC Bank and SBI, however, shed over 3% each.
ICICI Bank was up 1% at Rs 877.
On the other hand, Mahindra & Mahindra gained 5% to Rs 853. Wipro, HDFC, Sterlite and Bajaj Auto were up 4% each.
Reliance was up 3.4% at Rs 875. Larsen & Toubro rose 3.2% at Rs 1,337.
The stock recovered after sliding post announcing its order growth guidance for the current fiscal year to 5%, from 15% earlier at the time of announcing second quarter results on Friday.
Power major National Thermal Power Corporation (NTPC) today announced a 15% increase in its net profit at Rs 2,424 crore for the quarter ended September 2011 as against Rs 2,107 crore a year ago.
The stock advanced 1.4% to Rs 174.
BSE market breadth was neutral with 1,383 stocks on the advancing side and 1,361 stocks on the declining side.
