The Nifty rose to a two-year high on Wednesday, breaching the key psychological level of 6,000 at one point, after a U.S. deal on its so-called "fiscal cliff" sparked broad buying, while financial firms extended a recent rally on hopes of a rate cut this month.
U.S. lawmakers approved a plan to prevent huge tax increases and delay spending cuts that together would have pushed the world's largest economy into a likely recession.
However, despite expectations sturdier global economic growth and the Reserve Bank of India's easing actions would support portfolio inflows, some fund managers warned Indian shares are looking overbought in the near-term after rallying in 2012.
"Ahead of earnings season, there would be profit booking in January as corporates may stick to giving cautious outlook," said Deven Choksey, MD, K R Choksey Securities.
Reversal of interest rate cycle, which can spur growth and thereby markets, however, remain key for the medium term, added Mr Choksey.
The benchmark BSE index rose 0.68 per cent, or 133.43 points, to end at 19714.24, its highest close since January 6, 2011.
The broader NSE index rose 0.71 per cent, or 42.40 points, to end at 5993.25.
The index earlier rose to as high as high as 6,006.05 points, marking its highest intraday level since January 7, 2011.
Shares have rallied since last year, with the BSE index up 1.5 per cent in the two trading sessions so far this year after surging 25.7 per cent in 2012.
Also aiding the sentiment, India's manufacturing activity surged to a six-month high in December, boosted by strong factory output and a spike in new orders, both of which hit their highest levels since June, a business survey showed on Wednesday.
Financial shares led the gainers on growing hopes the RBI will cut interest rates for the first time since April when it meets on January 29.
Housing Development and Finance Corp rose 1.6 per cent, while ICICI Bank ended 1.3 per cent higher.
India's Bajaj Auto rose 3.3 per cent, marking its all-time high close, after reporting 13 per cent growth in total sales in December 20.
Shares of India's Bharat Heavy Electricals Ltd rose 2.3 per cent after the government imposed a 35 per cent safeguard duty on electrical insulators imported from China, in a bid to protect domestic manufacturers from cheaper shipments.
Aurobindo Pharma rose 4.3 per cent, extending Tuesday's 2.14 per cent gain, after it said it has got final approvals from U.S. FDA for Rizatriptan Benzoate tablets and the product is ready for launch.
However, among decliners, consumer stocks such as ITC fell as traders tracked a global 'risk-on' mood.
ITC fell 0.64 per cent, while Hindustan Unilever ended 0.02 per cent lower.
IT stocks too traded weak on worries about the outlook for the sector. Wipro fell 0.79 per cent, while Tata Consultancy Services was down 0.07 per cent. However, Tech Mahindra ended 0.65 per cent higher.
Bombay Stock Exchange's fast-moving consumer goods index rose 46.6 per cent last year, marking it one of the best-performing sectors.
Copyright @ Thomson Reuters 2012