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The Sensex ended 337.09 points (0.82 per cent) higher at 41,643.11 and the Nifty climbed up 100.45 points (0.82 per cent) to register a record closing of 12,282.95.
Thirty seven stocks on the 50-scrip index ended higher. Top percentage gainers were Tata Motors, Tata Steel, UltraTech Cement, JSW Steel and IndusInd Bank, finishing the session with gains ranging from 3.28 per cent to 5.10 per cent.
On the other hand, Eicher Motors, Bharat Petroleum, Bajaj Auto, Cipla and TCS - ending between 0.49 per cent and 2.30 per cent lower - were the top losers.
Reliance Industries, HDFC and Larsen & Toubro contributed the most to the surge in Sensex, together accounting for a gain of 175.54 points in the index.
Equities in other Asian markets kicked off the New Year higher after a day's holiday on optimism about an end to the US-China trade dispute.
The Nifty Metal index jumped as much as 2.76 per cent in afternoon, marking its biggest intraday gain in more than two weeks. The index finished the day up 2.68 per cent.
MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.35 per cent in morning trade after rising 5.6 per cent in December. Markets in Japan were closed for a national holiday.
China's central bank on Wednesday cut the amount of cash that banks must hold as reserves, releasing around 800 billion yuan ($114.91 billion) in funds to shore up the slowing economy.
Investors cheered news that the US and China will sign a trade pact soon after a year of volatile negotiations between the world's two largest economies.
US President Donald Trump said on Tuesday that first phase of the trade deal with China would be signed on January 15 at the White House. Rising hopes for a resolution to the US-China trade war helped propel global equities to record highs late last year.