Sensex soared over 350 points while the broader Nifty settled above its crucial psychological level of 8,700 in trade on Monday as expectations of a rate cut by the central bank lifted rate sensitive stocks.
The Sensex rose 377 points to close at 28,423 and Nifty advanced 127 points to close at 8,738.
Sentiment was also boosted as Asian and European shares got the new quarter off to a firm start as concerns eased about the health of German lender Deutsche Bank.
The Reserve Bank of India is due to hold its policy review tomorrow, with a monetary policy committee set to fix interest rates for the first time.
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.
Meanwhile, State Bank of India rose 1.5 per cent after the government extended Chairman Arundhati Bhattacharya's term by one year, allowing her more time to lead a clean-up of bad assets and oversee a merger of affiliates.
Auto makers also gained on the back of upbeat monthly sales.
Maruti Suzuki Ltd rose as much as 4.43 per cent to a record high after posting a rise of 31 per cent in September vehicle sales.
Mahindra and Mahindra, Eicher Motors and Hero MotoCorp also rose over 3 per cent each.
The gains in the broader markets were also strong with BSE midcap and smallcap indices rallying over 2 per cent each.