The markets were firmly entrenched in the positive territory on the first day of trading in 2013 as the US senate on Tuesday, two hours after a December 31 deadline had lapsed, approved legislation aimed at averting the "fiscal cliff" by stopping most tax hikes and across-the-board spending cuts that were due to begin with the new year.
The House of Representatives still must approve the measure, possibly on Tuesday.
Jim Rogers, the CEO of Rogers Holdings, told NDTV Profit that the US economy will likely be in recession in 2013 or 2014, and that the deal is unlikely to change the fiscal cliff situation. Only dramatic spending cuts will save the American economy, he added.
At 12.50 p.m., the 30-share BSE Sensex shot up 167 points to 19,611.78, while the 50-share NSE Nifty traded at 5,959.55, a gain of 51 points.
Persistent capital inflows from foreign funds into equity market also boosted market sentiment. Foreign institutional investors (FIIs) bought shares worth a net Rs. 826.34 crore yesterday as per provisional data from the stock exchanges.
Shares of realty, consumer durable, metal, capital goods and banking sectors firmed up sharply on good buying support. The broader markets performed well and the market breadth stayed positive.
Auto stocks were trading cautiously with the BSE Auto index gained 1.32 per cent at 11,529.24.
Private banks such as ICICI Bank gained 1.4 per cent, while HDFC Bank was up 0.5 per cent on hopes of a rate cut by the Reserve Bank of India by January end. State Bank of India is up nearly 2 per cent.
Option traders see a probability of Nifty inching closer to 6,200 levels in the January derivative series which ends on January 31.
Indian stocks could gain further next year due to expected interest rate cuts from the RBI and on improved earnings, while investors are also gearing up for a potential revival in initial public offerings.
The Sensex ended 2012 with its best gains in three years as strong foreign inflows and the government's fiscal and economic reforms outweighed worries about the domestic economy.
However, challenges remain, including over-leveraged banking and corporate sectors as well as the prospect of a sovereign ratings downgrade should the government fail to get its finances under control.
"(The) most important challenge is of fiscal deficit which will remain in 2013," said Vaibhav Sanghavi, director at Ambit Capital.
India's current account deficit widened to a record high at 5.4 per cent of gross domestic product in the September quarter as export growth slowed more sharply than imports, with a similar gap expected in the December quarter likely to prolong weakness in the rupee.
With inputs from Reuters