The BSE Sensex extended its rise for the third straight session as they gained 0.9 per cent on Monday, with state-run oil companies rallying after the government raised state-controlled fuel prices, which would boost their earnings.
Traders said the market was riding an upbeat mood after last week's 2-per cent rally, the first weekly rise since early June, and helped by demand from fund managers looking to spruce up their portfolios before the quarter closes.
A tumble in global oil prices also lifted the sentiment.
The government raised diesel prices by about 9 per cent late on Friday after months of delay, a politically unpopular move that will add to inflationary pressure but also eases the government's subsidy burden and could bolster its image among wary investors.
State-run explorer Oil & Natural Gas Corp, whose subsidy burden will drop following the increase in fuel prices, rose as much as 9.1 per cent early. It closed 4.2 per cent higher.
Oil marketing companies Hindustan Petroleum Corp, Bharat Petroleum Corp and Indian Oil Corp rallied between 3.2 per cent and 5.8 per cent.
The 30-share BSE index firmed 0.94 per cent, or 171.73 points, to 18,412.41 points, with 23 components advancing. It rose more than 1 percent earlier, extending Friday's 2.9 per cent rise.
"Market welcomed the hike in fuel prices, as it was a bold step towards implementing reforms," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services.
Foreign funds turned net buyers on Thursday with an investment of $108 million, after being sellers of $688 million over the previous eight sessions.
But, the gains in the stock market are not as seen as sustainable as macro headwinds weigh.
"It will be rangebound for now. There is no reason for it to go all over the place, unless the June-quarter earnings bring along positive surprises,' said Rawal.
The BSE main index is headed for its second annual decline in a decade as persistently high inflation, rising interest rates and slowing growth keep investors at bay, a Reuters poll showed last week.
The median forecast of 18 investment houses, brokerages and research firms taken over the past week, sees the benchmark at 19,750 at end-2011 and at 21,500 by next June.
Financials led the gains and rose for the fourth day, after a dismal performance this year. The banking sector index firmed 1.6 percent, but is still down 6.4 percent year to date.
Leading lenders State Bank of India, ICICI Bank and HDFC Bank gained between 1.4 per cent and 1.8 per cent.
The 50-share NSE index closed 1 per cent higher at 5,526.60 points.
Gainers outnumbered losers in the ratio of 1.7 to 1 in the broader market.
Volumes improved a bit, with around 618 million shares changing hands on the NSE, compared with the 90-day average daily volume of 601 million shares.
World stocks fell as investors went on the defensive ahead of a Greek austerity vote this week that may sow stronger doubts about financial stability and economic recovery.
World stocks as measured by MSCI were down 0.1 per cent by 1028 GMT, while emerging market stocks lost 0.5 per cent.