Markets made a smart recovery in late trades led by gains in IT and realty shares, shrugging off concerns of rate hike on Friday.
The Sensex ended up 167 points, at 16,877 and the Nifty surged 63 points, at 5076.
The Nifty opened higher, tracking firm cues from Asia, but investors booked some profits before the RBI policy.
The index touched a low of 4,960 in the mid-morning session; however the index recovered around noon deals and rallied over 1% in the last one hour of trade.
Positive re-assurances that Euro-zone countries France and Germany would stand by Greece in case of a default lifted European markets.
In Asia, the Nikkei Stock Average closed up 2%, the Hang Seng index added 0.7%, but China's Shanghai Composite bucked trend and closed down 0.2%. In Europe, the DAX, CAC and the FTSE indices were up almost 2% each.
On the macro front, food inflation for the week ended September 3rd climbed to 9.5% versus 9.6% in the previous week, increasing expectations of a rate hike. Credit Suisse in the research note said "Inflation worries are likely to dominate growth concerns in the near term, causing the RBI to hike rates by 25 bps on Friday."
The Indian markets have corrected almost 16% year-to-date and may be pricing in most of the concerns and the headwinds may be peaking according to market analysts.
Reliance Mutual fund in their weekly market update said, "The Indian equity markets are looking much better now than they were in 2008, as fears of 2008-like meltdown seems
Reliance Mutual Fund recommends investors to invest now, for relatively better returns in 12-18 months.
Besides the RBI policy, markets will take cues from the advance tax numbers.
Among the heavyweights, Larsen and Toubro is seen paying Rs 350 crore as advance tax for July-September this year as compared to Rs 300 crore last year, Reliance Industries is expected to pay Rs 200 crore for the same period, 67% higher than last year, according to news reports.
Infosys, State Bank of India and HDFC were the top gainers, up between 2-4%; while Larsen & Tourbo, BHEL and Hindustan Unilever dragged the index down, down almost 1% each.
BSE IT shares were among the top gainers for the second consecutive day, up the index was up 2% as rupee dipped for the ninth consecutive session in a row and touched a low of Rs 47.9.
The rupee trimmed losses and was hovering around 47.72 around 4:00 pm.
Among the IT stocks, Patni Computer rallied over 5%, Oracle Finance and HCL Technologies were up almost 2% each.
Realty shares were on a firm ground, the BSE realty index rallied over 3%; DB Realty was the top gainer, up 6%, followed by Sobha Developers and Unitech, up over 5% each.
BSE Capital goods index was reeling under selling pressure, down 0.7%. Top losers were Pipavav Shipyard, down over 4%, Areva T&D and Larsen & Tourbo declined over 1% each.
From the broader markets, midcap and the smallcap indices ended up 0.6% and 0.3% each.
Market breadth was positive, 1546 stocks are advanced for 1235 stocks which declined.
