At its day's high, Sensex rose as much as 430 points to 27,937.
The country's top bankers have gathered in Pune in a one-of-a-kind huddle to discuss long-pending reforms vital to improving the health of ailing public sector banks in Asia's third-largest economy.
Besides the heads of all public sector banks, the two-day meeting ending on Saturday will also be attended by Prime Minister Narendra Modi, Finance Minister Arun Jaitley and Reserve Bank of India Governor Raghuram Rajan.
On hopes of faster reforms in the sector, banking stocks index, Bank Nifty, rose 1.64 per cent. The index made a record high of 19,118.85 earlier in the day, surpassing the previous peak of 18,923.60 hit on December 23.
ICICI Bank gained 2.84 per cent, Axis Bank rose 2.24 per cent, while Kotak Mahindra Bank advanced 1.54 per cent. Among public sector banks, Bank of Baroda rose 1.2 per cent. Punjab National Bank and SBI also ended higher.
The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, rose to 54.5 in December from 53.3 in the previous month, its highest since end-2012, as new orders flooded in and factories kept price increases to a minimum.
Investors expect the Narendra Modi-led government to continue with the reforms process while fresh buying was seen ahead of the December-quarter earnings.
"People have started building positions ahead of the Budget. Overseas investment flow is again expected to be firm. The recent correction has provided valuation comfort. We expect the momentum to continue," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.
Infosys advanced 1.97 per cent ahead of its earnings. The IT outsourcer will report its earning on January 9, kicking off the third quarter earnings season.
HDFC was the top gainer in Nifty, up 4.26 per cent, followed by Asian Paints, which advanced 3.46 per cent.
BHEL closed 2.5 per cent higher after the company bagged a Rs 3,810 crore order from Telangana government.
BPCL was the top loser in Nifty, ending 1.5 per cent lower. The government increased excise duty on petrol and diesel by Rs 2 per litre.
The Sensex ended 380.36 points higher at 27,887.90, while the 50-share Nifty closed 1.35 per cent higher at 8,395.45. (With Agency Inputs)