Indian equities were also supported by a rebound in Chinese and other Asian markets. After falling as much as 8 per cent on Monday, the Shanghai Composite Index on Tuesday gained over one per cent.
Brent, the global oil benchmark, on Tuesday fell as much as $53.95 a barrel, as traders weighed the impact on global demand from the spread of coronavirus, which has probably cut China's oil consumption by 20 per cent, according to analysts.
"Market witnessed a V-shape recovery post the overreaction on the budget day, as the expectation was too high.
"Market is focusing on the earnings growth and global trend, Q3 has provided a positive trend to earnings while the global market is positive," said Vinod Nair, Head of Research, Geojit Financial Services.
The benchmark Sensex closed 917.07 points higher at 40,789.38 while the Nifty settled at 11,979.65, higher by 271.75 points. The broader markets- BSE-Midcap and BSE-Smallcap underperformed the benchmark but closed over 1 per cent higher.
Gains were seen across all sectors led by manufacturing sector stocks. Nifty metal index jumped 3.32 per cent followed by auto, banks and financial sector stocks.
On February 1, the Sensex had plunged 987 points as investors were disappointed over the lack of a major stimulus package in the Union Budget announced on taht day.
"Post budget, the market has shifted its focus back to fundamentals and earnings. With strong PMI data, in-line January auto sales numbers and decent Q3FY20 earnings season so far, the sentiments have turned positive," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services Private.
Khemka added that the investors now are awaiting the monetary policy which is due on Thursday and where the Reserve Bank of India is expected to maintain the status quo, due to the continuing inflation. However, the outlook given by RBI would be highly watched out.
Besides, IHS Markits on Monday said that the Manufacturing PMI index which rose from 52.7 in December jumped to 55.3 in January, its highest level in just under eight years.
Meanwhile, provisions data from the exchanges showed, foreign institutional investors sold equities worth Rs 1,200.27 crore on Monday, while domestic institutional investors purchased shares worth Rs 1,286.63 crore.
( With inputs from IANS )