The Sensex and Nifty ended higher for a fourth consecutive session as banks rallied after the central bank allowed lenders to include old 500 and 1,000 rupee notes as part of their cash balance, making it easier to meet cash reserve ratio requirements.
But indexes still posted their biggest fall since February as the sentiment was dented by fears about the economic fallout from the country's demonetisation drive and on heavy foreign selling.
The BSE index rose 258.80 points or 0.98 per cent to 26,652.81, but was down 4.61 per cent this month.
The broader NSE index ended up 82.35 points or 1.01 per cent at 8,224.50, but fell 4.79 per cent for the month.
Among BSE sectoral indices, consumer durables index gained the most by 2.46 per cent, followed by banking 2.2 per cent, capital goods 1.57 per cent and infrastructure 1.19 per cent.
Top five Sensex gainers were ICICI Bank (+3.62%), Maruti (+3.39%), SBI (+2.15%), L&T (+2.07%) and HDFC Bank (+1.74%), while the major losers were Lupin (-0.91%), GAIL (-0.74%), Cipla (-0.45%), Reliance (-0.31%) and Coal India (-0.1%).
US GDP growth
The election of Donald Trump as the US President has sparked flows from emerging markets to the United States. Data on Tuesday showed the US economy grew faster than initially thought in the third quarter, notching its best performance in two years.
FII selling
Foreign investors have sold a net $2.46 billion in Indian shares so far this month, their biggest monthly sales since August 2015, according to data compiled by NewsRise Financial.
But worries about demonetisation are starting to subside. HSBC has cut its target for the BSE index to 30,500 from 32,400 by the end of 2017, but said it remained “overweight” on Indian stocks.
“We believe the cash situation will return to something approaching pre-demonetisation levels over the next four-six weeks,” HSBC said in a note.
“Once the cash crunch is over, we should see growth in financial inclusion, digital payments and banking liquidity as parts of the shadow economy move into the mainstream, boosting growth.”
A report by SMC Global said: "Asian stocks edged higher today reflecting upbeat US growth news, while oil steadied after a sharp drop as OPEC struggled to agree on a production cut. US stocks closed higher on Tuesday with the Nasdaq touching a record, but the market failed to make much headway as oil futures slumped ahead of a key meeting of major crude producers. US consumer confidence index surged to 107.1 in October from an upwardly revised 100.8 in October. Economists had been expecting the index to climb to 101.0 from the 98.6 originally reported for the previous month. With the bigger than expected increase, the consumer confidence index reached its highest level since hitting 111.9 in July of 2007."