However, selling pressure in metal and energy stocks capped the gains. The Sensex gained 126 points to end at 27,585 while Nifty rose 38 points to 8,323.
Among banking stocks, IndusInd Bank rose 3.4 per cent while Bank of Baroda, SBI and ICICI Bank gained 1-2 per cent.
Retail inflation data for December is due later in the day. Analysts polled by Reuters expect December to accelerate to 5.4 per cent in December, after a record low of 4.4 per cent in the previous month. But they are optimistic that there still remains a good chance that the Reserve Bank of India will cut interest rates, possibly after the government presents its annual budget in late February.
Infosys, which beat December-quarter earnings estimates on Friday, rose 2 per cent, following the sharp 5 per cent jump on Friday. "Infosys is inching close to TCS as far as margins are concerned... It looks a good bet," said TS Harihar of HRBV Client Solutions. Among other IT stocks, HCL Tech rose 2 per cent and Tech Mahindra advanced 2.7 per cent.
FMCG major HUL rose 3.7 per cent to be the biggest Nifty gainer. Prakash Diwan, director at Altamount Capital Management, said that speculation about an open offer from its parent Unilever is driving the HUL stock.
Selling pressure in metal and oil & stocks weighed on the markets. Coal India was the top Nifty loser, down 4.6 per cent on speculation that the government will soon come out with a date for 10 per cent stake sale in the PSU major.
"There are few takers for Coal India in the current environment," said Prakash Diwan, director at Altamount Capital Management.
Among other major losers, JSPL, Cairn India and Hindalco fell 2-3 per cent. Market heavyweight RIL fell over 1 per cent.