The markets edged higher and ended the trading session near the day's high after the Reserve Bank of India cut repo rate by an unexpectedly sharp 50 basis points.
The BSE Sensex ended at 17,358, up 207 points and the Nifty ended at 5,290, up 64 points.
The RBI cut its policy repo rate to 8%, compared with market and expert expectations for a 25 basis point cut. It kept the cash reserve ratio, the portion of deposits which banks are required to keep with the central bank, unchanged at 4.75%.
It also warned that India's current account deficit, which widened to 4.3% of GDP in the December quarter, is "unsustainable" and will be difficult to finance given projections of lower capital flows to emerging markets in 2012.
During the day, the BSE benchmark index touched the day's high at 17,382 and the day's low at 17,103.
In Asia, Japanese shares steadied after the previous session's sharp losses, though social gaming firm Gree Inc jumped as an upbeat sector report from Bank of America Merrill Lynch forced investors to cover short positions.
The Nikkei closed down 0.1% at 9,464.71 after shedding 1.7% on Monday, falling below the psychological key level of 9,500 on concerns over Spain's ability to finance its debt.
The Hang Seng and Shanghai Composite indices ended lower by 0.23% and 0.94%, respectively.
Meanwhile, European markets are broadly higher today with shares in France leading the region.
At 1600 hours, the CAC 40 was up 1.54% while Germany's DAX was up 1.08% and London's FTSE 100 was up 0.77%.
Back home, Deven Choksey, MD, KR Choksey Securitie said, "Banks are favourably placed currently as there is ease in Inflation.
Further, with this 50 bps rate cut, they have been given some relief on the liquidity front.
The interest rate cut has arrested the declining growth while keeping the Inflation numbers under control.
The RBI will try to make sure that liquidity is available in the system, which will lead to further rate cuts in the coming months."
Meanwhile, on Monday, the headline wholesale price index eased slightly to 6.89% for March but was still above expectations, as a drop in manufacturing inflation was offset by a surge in food inflation.
Shares of rate-sensitive sectors such as banking, real estate and automobiles gained in trades, post the announcement by the RBI.
BSE Realty index ended at 1,824 levels, up 2.4%. The prominent gainers from the space were DB Realty, HDIL, DLF and Unitech, up 3-4% each.
BSE Bankex and Auto indices advanced 1% each after having recovered from their losses.
All the sectoral indices ended the day in the green.
ONGC advanced 3.6% at Rs 269 and was the top gainer on the Sensex. Coal India advanced 3% at Rs 350 and was the top gainer on the Sensex after the company's board of directors approved the draft of the fuel supply agreements to be signed with power plants before April 20 with almost a negligible penalty level, in case they fail to meet the 80% commitment mark.
The board has decided to keep the penalty at 0.01% of the value of shortfall. Other prominent gainers include Hindalco Industries, DLF and Hero MotoCorp, up 3% each.
Mahindra & Mahindra, Reliance Industries and Maruti Suzuki, down marginally, were the only losers from the pack.
The overall market breadth was positive as 1,663 stocks advanced against 1,160 declining ones, on the BSE.