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a rally in debt markets boosted banks, the biggest holders of bonds, while sentiment remained underpinned by global factors.
The prospect of extended stimulus in the United States and signs of ambitious reforms in China have spurred a rally this week in Asian shares.
Overseas institutional investors are heading towards their third straight month of buying in Indian cash shares, totalling more than $5 billion since August, regulatory data showed.
Traders say with the results season coming to an end, the market will focus on how developments on the global front and state elections will impact foreign fund flows. "The new (incoming) Fed chairperson hinted that quantitative easing may not stop for a while. Along with that China has announced reform plans that are bringing dollars back into Asia," said Shrinivas Viswanath, co-founder of RKSV Securities, referring to testimony from U.S. Fed chairman nominee Janet Yellen last week.
"Hopefully, we can convince FIIs that our reform plans, those announced and upcoming, are good reasons to continue investing in India," Viswanath added.
The benchmark BSE index rose 0.19 percent, or 40.08 points, to end at 20,890.82, marking its highest close since Nov. 6.
The broader NSE index rose 0.23 percent, or 14.35 points, to end at 6,203.35, marking its third consecutive session of gains.
Banks rose on the back of a rally in debt markets, which benefited from a stronger rupee and the introduction of a new benchmark 10-year bond this week. Banks benefit from higher debt prices given that they are the biggest holders of government bonds.
State Bank of India Ltd rose 3.2 percent, while ICICI Bank Ltd ended 1.1 percent higher. Metal shares gained after China unwrapped its boldest set of economic and social reforms in nearly three decades on Friday.
Jindal Steel And Power Ltd gained 4.2 percent, while Hindalco Industries Ltd ended 4.4 percent higher.
Financial Technologies (India) Ltd rose 2 percent, adding to Monday's 20 percent gains, after the company said its unit will sell its stake in SMX to ICE Singapore Holdings Pte Ltd for $150 million.