Anand Mahindra, chairman of India's biggest utility vehicle maker M&M, tweeted, "Three cheers! The RBI Governor has moved from being 'Reluctant Raghu' to 'Rate-cut Raghu'!".
Forty seven of the 50 Nifty shares traded higher reflecting the optimism in markets.
Gains were led by rate sensitive stocks such as realty, banks and auto. Share of real estate developers surged on hopes that lower rates will drive demand for homes. DLF, India's biggest listed realty firm, jumped 11 per cent.
The Bank Nifty, the blue chip index of banking stocks, hit an all-time high on hopes of greater credit offtake, which has been sluggish over the previous few quarters. IDFC, HDFC and ICICI Bank traded with over 5 per cent gains.
Auto stocks also rallied sharply on hopes of rising demand amid lower loan rates. M&M shares jumped nearly 4.5 per cent to find a place among the top five Nifty gainers.
Explaining the sharp gains in markets, Sonal Varma of Nomura said, "The shift in RBI monetary policy stance towards easing should lead the market to price in further rate cuts. This would support a pickup in local growth momentum and further raise the prospects for foreign portfolio inflows."
Morgan Stanley economists expect a further 125 basis point rate cut over the next 12 months. "Our rate cut forecast is predicated on our view that CPI inflation will stay at closer to 5 per cent in most of the calendar year 2015, as the reduction in fiscal deficit, sustained deceleration in rural wages and lower global commodity prices will mean that inflationary pressures in the economy will be contained," said Chetan Ahya of Morgan Stanley.
Motilal Oswal, chairman of the eponymous financial services firm, tweeted, "This rate cut is a beginning of a series of rate cuts by RBI given Rajan's commitment to NOT FLIP FLOP once he begins the process."
The rupee also jumped by over 56 paise or nearly 1 per cent to trade at nearly two-month high of 61.55 against the dollar today. Analysts expect the currency to strengthen further.
"Since October 2002, the INR has rallied in 7 of the 10 rate cut announcements, with an average gain of 0.3 per cent against USD over the subsequent two sessions. The Nifty rose in 8 out of the 10 occasions, with an average 1.9 per cent gain," said Nomura.
Analysts expect markets to post new highs soon, given the continued pressure on crude oil prices and hopes of further reforms in the upcoming Budget.
As of 2.20 p.m., the Sensex traded 726 points higher at 28,072, while the Nifty was up 216 points at 8,493.