The Sensex and Nifty rose more than 1 per cent, posting their biggest gains in nearly a month, as expectations of a rate cut by the central bank lifted lenders, while auto stocks such as Maruti Suzuki rallied after reporting strong monthly sales.
Sentiment was also boosted as Asian shares got the new quarter off to a firm start, with MSCI's broadest index of Asia-Pacific shares outside Japan gaining 0.8 per cent, as concerns eased about the health of German lender Deutsche Bank.
Domestic sentiment was also buoyed as manufacturing PMI for September came in above the 50 mark for the ninth straight month signalling expansion.
The Nikkei Markit India Manufacturing Purchasing Managers’ Index (PMI) — a gauge of manufacturing performance — settled at 52.1 in September from 52.6 in August.
The 30-share BSE index Sensex ended higher by 377.33 points or 1.35 per cent at 28,243.29 and the 50-share NSE index Nifty was up 126.95 points or 1.47 per cent at 8,738.10.
Among BSE sectoral indices, realty index gained the most by 3.01 per cent, consumer durables 2.65 per cent, infrastructure 2.61 per cent and metal 2.45 per cent.
Top five Sensex gainers were Maruti (+3.7%), Hero MotoCorp (+3.18%), Adani Ports (+3.00%), Power Grid (+2.72%) and L&T (+2.67%), while the only two losers were TCS (-0.63%) and Infosys (-0.02%).
“Markets will look ahead to the RBI policy meeting decision, where we are expecting a 25 bps cut. Going ahead, a decision on GST rates, the US Presidential elections and quarterly results will be the key triggers to watch out for,” said Dipen Shah, Senior Vice-President and Head-PCG research, Kotak Securities.
Analysts were broadly divided on the outcome, with about 60 per cent of the 44 analysts polled by Reuters expecting the central bank to hold rates and the rest expecting at least a 25 basis point cut.
The meeting on Tuesday will also be Urjit Patel's maiden policy review as the governor.
“There is some optimism because of an expectation of a rate cut,” said Saurabh Jain, assistant vice president of research at SMC Global Securities.
European stock markets made minor gains on Monday, as a rise in the shares of fund management companies in the wake of a large merger in the sector propped up markets.
Nevertheless, lingering concerns over Deutsche Bank still weighed on the minds of some investors.
A report by SMC Global said: " Asian stocks rose , with the regional benchmark index rebounding from a one-week low, as worries over the health of European banks eased and Japanese shares climbed on a weakening yen. US stocks closed higher Friday, but off their session highs, boosted by a double-digit rally in Deutsche Bank AG shares, which were recovering from brutal losses in the previous session amid heightened concerns about the health of the German lender's balance sheet. Greece's retail sales increased for the first time in 14 months in July, figures from the Hellenic Statistical Authority showed. Retail sales grew 7.1 per cent year-over-year in July, reversing a 5.2 per cent decline in the previous month. Except automotive fuel, retail sales expanded 8.1 per cent in July from a year ago. Sales of automotive fuel alone rose 0.2 per cent and sales at food sector logged a growth of 5.6 per cent."