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The Sensex ended 680.22 points - or 1.60 per cent - higher at 43,277.65 and the Nifty settled at 12,631.10, up 170.05 points - or 1.36 per cent - from its previous close - both record closing highs. Strong buying interest in banking and financial services shares led the markets higher. (Track Sensex, Nifty Here)
Bajaj Finance, IndusInd Bank, Larsen & Toubro, Bajaj Finser and State Bank of India, closing between 5.69 per cent and 8.93 per cent higher, were the top percentage gainers in the 50-scrip Nifty basket.
Tech Mahindra, Cipla, HCL Tech, Divi's Laboratories and Nestle, down 3.83-5.73 per cent each, were the worst hit among 18 laggards in the index.
HDFC, HDFC Bank, ICICI Bank and Reliance Industries were the biggest contributors to the gain in Sensex.
US-based drug maker Pfizer said its COVID-19 vaccine, developed with German partner BioNTech SE, was more than 90 per cent effective in preventing infection, marking the first successful results from a large-scale clinical trial. The news sparked renewed optimism in equities around the world.
"The vaccine news is a big relief for markets and investors are hoping that the economic recovery will take place sooner," said Samrat Dasgupta, chief executive officer at Esquire Capital Investment Advisors. "However, the next six months will be crucial as we see more developments on the vaccine."
Investors hoped that the vaccine would help the travel and hospitality sectors return to normalcy after facing restrictions because of the coronavirus lockdowns, he added.
However, some analysts sounded caution over the speed in which the vaccine could be implemented. Brazil's health regulator said on Monday it had suspended clinical trials for China's Sinovac coronavirus vaccine after adverse effects had emerged.
Investors also turned their focus to elections in Bihar, where the ruling NDA surged ahead of the opposition alliance of Rashtriya Janata Dal, the Congress and Left parties.
European share markets started the day on a positive note, with the United Kingdom's FTSE 100 benchmark index last seen trading 0.61 per cent higher in early deals. Earlier, Asian markets continued to rise, led by a 29-year high in Japan's Nikkei 225 benchmark as airline, travel and tourism stocks jumped.