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The benchmark BSE Sensex surged nearly 450 points and the broader NSE index jumped as much as 1.6 per cent to an 18-month high as tepid US payrolls data last week tempered expectations of a September rate hike by the Federal Reserve.
Sentiment was also boosted by gains in Asian stock markets as traders trimmed the probability of a Fed rate hike this month to 21 per cent from 24 per cent on Thursday, according to CME Group's FedWatch program.
Domestic sentiment was also buoyed after the country's services sector growth touched the highest level in over three-and-a-half years of 54.7 in August, from 51.9 in July.
The NSE index closed 133.35 points or 1.51 per cent higher at 8,943.00 after earlier hitting its highest since March 5, 2015.
The benchmark BSE index ended up 445.91 points or 1.56 per cent at 28,978.02 after hitting its highest since April 15, 2015 earlier in the session.
All BSE sectoral indices ended in the green. Among them, banking index gained the most by 2.96 per cent, consumer durables 2.94 per cent, auto 2.83 per cent and power 1.39 per cent.
Gainers, losers
Major Sensex gainers were Tata Motors (+7.19%), Axis Bank (+6.14%), ICICI Bank (+4.25%), Tata Steel (+3.25%) and Maruti (+3.04%), while the only four gainers were TCS (-1.17%), Coal India (-1.11%), Wipro (-0.11%) and ITC (-0.04%).
Foreign investors have been buying into Indian shares apart from those in other emerging markets this year, bringing the total net investments in the year to $6.05 billion.
“September rate hike talks have been put to rest now. Therefore, this liquidity-driven rally is expected to continue for the time being, which is comforting our markets,” said Pankaj Pandey, head of research at ICICI Securities.
Global markets
World shares closed in on one-year highs on Tuesday as the prospect of prolonged cheap borrowing costs and a recent rise in oil prices set off a new emerging market bull run.
Britain’s FTSE 100 was the laggard, spending a second day in the red, as sterling’s slow recovery after the country voted to leave the European Union left investors looking at companies' competitiveness again.
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