The rise was led by the export-oriented IT stocks, but looming concerns of a liquidity crisis in the non-banking financial companies (NBFCs) persisted, leading to a decline in the banking and financial stocks, analysts said.
The banking and financial stocks trimmed the initial gains in the market. US President Donald Trump said he would drop plans for tariffs on Mexico after the country promised new steps to check illegal migration into the US.
"I am pleased to inform you that the United States of America has reached a signed agreement with Mexico," Trump said in a tweet on Friday night.
"The tariffs scheduled to be implemented by the US on Monday, against Mexico, are hereby indefinitely suspended."
The Sensex on Monday closed at 39,784.52, higher by 168.62 points, or 0.43 per cent, than the previous close of 39,615.90 points.
Earlier in the day, it rose 363 points to touch an intra-day high of 39,979.48. Its intra-day low was 39,619.97 points.
The Nifty50 on the National Stock Exchange closed the day's trade at 11,922.70, higher by 52.05 points or 0.44 per cent, over the previous close of 11,870.65.
Data on the BSE showed that foreign institutional investors (FII) invested a net amount of Rs 216.20 crore and the domestic institutional investors (DII) invested a net amount of Rs 170.62 crore.
On the Sensex, the top gainers during the day were Tata Consultancy Services (TCS), Infosys, Bharti Airtel, Axis Bank and ITC and the major losers were Yes Bank, Coal India, Tata Motors, ONGC and Hero MotoCorp.
In a major stock-wise development, shares of Jammu and Kashmir Bank settled 12 per cent lower after its Chairman Parvez Ahmed was removed by the state government on Saturday on charges of nepotism and corruption.
The state Anti-Corruption Bureau (ACB) also carried out a raid at the bank's corporate office in Srinagar for two days after Ahmed's removal. ACB officials said documentary evidence regarding the mismanagement, nepotism and corruption by the ousted Chairman were collected and investigations were on.
Earlier in the day, the shares of Jammu and Kashmir Bank slumped nearly 20 per cent to an intra-day low of Rs 47.60 per share. On Monday, the bank said that it has received the Reserve Bank's approval to appoint R.K. Chhibber as the interim Chairman and Managing Director of the bank for a period of three months with immediate effect.
( With inputs from IANS )