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Renewed buying interest in late trades on hopes of BJP-led NDA winning the general elections, results of which are due on Friday pushed the benchmark indices to record closing highs.
The 30-share Sensex ended up 90 points at 23,906 and the 50-share Nifty ended up 14 points at 7,123.
The volatility index surged 13.3% to end at 36.75.
The VIX or volatility index is a measure of future volatility as priced in option premiums.
Premiums tend to be on the higher side in anticipation of major events and correct after the event plays out.
"Assuming exit polls are correct in predicting a stable government at the centre, we may see some more upside after which the market may enter a sideways phase until there is more clarity on the policies and initiatives of the new government.
"In a scenario of a hung parliament, we may see at least 10% immediate downside from current levels," says Vikram Dhawan, Director, Equentis Capital.
Wholesale Price Index-based inflation fell to two-month low of 5.25% in April from 5.7% in March, as all three major components of the index -- food, fuel and manufactured goods -- recorded moderation in prices.
In March, WPI inflation was at a three-month high. It had stood at 4.77% in April last year.
The data comes days after after consumer inflation hit a three-month high of 8.59% in April and industrial production posted a second straight contraction in March.
The rupee was trading higher at Rs 59.33 compared to the previous close of Rs 59.68. Gains in late trades in the equity markets also helped improved sentiment.
Asian markets reversed some of the early losses and were trading mixed even as easing of credit by the European Central Bank pushed yields on European and US bonds lower.
Japanese shares witnessed profit taking while a stronger yen weighed on market sentiment.
The Nikkei ended down 0.75% while the Shanghai Composite ended down 1.1%. Hang Seng and Straits Times ended up 0.4-0.6% each.
European shares were trading marginally lower shrugging off Germany's robust economic growth during the first quarter. FTSE, CAC and DAX were down 0.1-0.2% each.
The BSE Consumer Durables, Oil and Gas indices were among the top gainers along with Power and FMCG indices.
HDFC and HDFC Bank ended up 1.2-1.5% each, contributing the most to the Sensex gains. Meanwhile, MSCI has reduced HDFC Bank's weightage in the MSCI INdia Index to 1.89% from 5.4%.
In the oil and gas space, index heavyweight Reliance Industries ended up 0.7% and ONGC gained 2.8%.
Other Sensex gainers include, ITC, Infosys and Hindustan Unilever.
Sun Pharmaceutical Industries gained 1.7% to end at Rs 622 after the company announced settlement of litigation for generic Gleevec in United States.
Tata Steel ended up 1.9% after reporting a better-than-expected consolidated net profit at Rs 1,036 crore for the fourth quarter ended March 31 2014 (Q4), due to higher sales volumes and better realisations in Europe and India.
The country’s third largest steel producer had reported a net loss of Rs 6,529 crore in the same quarter last fiscal.
Tata Motors ended down 0.7%.
The company today reported 7.65% decline in its global sales, including that of Jaguar Land Rover, to 75,026 units in April.
The company had sold 81,241 units in April last year, Tata Motors said in a statement.
Other Sensex losers include ICICI Bank, L&T, Bajaj Auto and TCS.
Among other shares, Aurobindo Pharma ended flat at Rs 615 after MSCI added the pharmaceutical company to MSCI India index with effect from May 30.
Nilkamal soared 10% to end at Rs 232 after reporting nearly three-fold jump in net profit at Rs 14.13 crore for the quarter ended March 31 2014 (Q4), on the back of strong operational performance.
The plastic products maker had posted a profit of Rs 4.79 crore in the same quarter year ago.
Asian Paints dipped nearly 5% to end at Rs 528 after reporting a fourth-quarter net profit in line with analysts' estimates.
However, the EBITDA margin remained flat at 14.7% on account of higher raw material costs.
Oberoi Realty extended gains by 3% to end at Rs 220 after the Mumbai-based real estate developer recently said that it has raised Rs 750 crore through the issue of non-convertible debentures.
Bank of India ended down 3.3% at Rs 263 after the state-owned bank reported decline in net profit because of higher operating expenses while asset quality concerns also weighed on the stock.
Net profit for the quarter declined 26% to Rs 557.50 crore compared with Rs 756.60 crore in the same quarter last fiscal.
In the broader market, the BSE Mid-cap and Small-cap index ended down 0.8% each.
Market breadth was negative with 1736 losers and 1160 gainers on the BSE.