Indian shares jumped 3.6 per cent on Monday -- their biggest single-day gain since May 2009 --joining a rebound across Asia, after the US Federal Reserve chief raised hopes for further monetary stimulus in the world's biggest economy.
Software services companies, whose biggest market is the United States, financial stocks and Reliance Industries, which had all been beaten down in recent weeks, led the recovery, as investors bought stocks and covered short positions.
The 30-share BSE index closed up 3.58 per cent, or 567.50 points to 16,416.33, with 28 of its components closing in the green, after rising as much as 3.9 per cent earlier. The rebound came after three straight sessions of losses.
"The initial gains were on account of short covering. But the fact that gains have sustained for the entire day shows that there has been some serious buying as well," said D.D. Sharma, senior vice president at Anand Rathi Securities.
"It looks like value buyers are more confident because of all the events over the weekend. For now, it looks like a bottom has been formed and the market should consolidate."
Ben Bernanke, who spoke at an annual Fed conference on Friday, gave no details of further action to boost the US recovery, but said the central bank's policy panel would meet for two days next month instead of one to discuss more monetary stimulus, offering some hope to investors.
An almost two week-long anti-graft protest in India also ended on Sunday, which analysts said could help ease the uncertainty for the federal government.
Software stocks, which stand to gain if the outlook for the US market improves, led the gains, with export-powered Tata Consultancy Services rising 7.5 per cent. Smaller rivals Infosys and Wipro gained 4.3 per cent and 2.9 per cent, respectively.
Banking stocks, which have seen a sharp sell-off in recent weeks over worries about credit demand amidst rising interest rates, recovered sharply, helped by short covering.
Largest lender State Bank of India rose 2.7 per cent, while rivals ICICI Bank and HDFC Bank were up 4.6 per cent and 4 per cent respectively.
Shares of banking licence hopefuls L&T Finance Holdings and Reliance Capital also ended about 10 per cent higher after the central bank released draft guidelines for licensing of new banks in the private sector.
Energy major Reliance Industries , which was briefly toppled by Coal India as the country's top-listed firm , rose nearly 5 per cent to Rs 755.05, its biggest single-day gain since November 2009.
Reliance, a favourite with foreign investors, has been weighed down over the past few months due to slowing gas output and margin worries across its other segments. Before Monday's gains, it had fallen almost 30 per cent in 2011, compared with a 21 per cent decline in the main index.
Shares in largest listed developer DLF Ltd rose 4.7 per cent after the Financial Express newspaper reported the company was in talks to sell its 70 per cent stake in DLF IT Park on the outskirts of New Delhi to financial services firm IDFC, to help cut its debt.
State-run Oil and Natural Gas Corp bucked the trend, ending down 1.1 per cent ahead of a board meeting to approve a draft prospectus for a follow-on share sale. Analysts believe the public offer is unlikely in the current volatile market.
The 50-share Nifty index ended 3.6 per cent higher at 4,919.60 points.
In the broader market, 1,243 advances overwhelmed 213 declines on a robust volume of 546.4 million shares.