Banking stocks gained the most on the exchanges. IndusInd Bank, State Bank of India, ICICI Bank and HDFC Bank closed with strong gains ranging between 3 to 6 per cent. The Bank Nifty index jumped by 3.67 per cent.
The Sensex closed 645.97 points higher at 38,177.95 while the broader Nifty settled at 11,313.30, or 186.90 points up as the government announced a 5 per cent hike in dearness allowance (DA), that could boost festival demand.
"The gains came on the back of bargain hunting. Sentiments also turned positive after the government on Wednesday hiked the dearness allowance (DA) by 5 per cent from 12 per cent to 17 per cent entailing an outgo of Rs 16,000 crore," said Deepak Jasani of HDFC Securities.
Meanwhile, Yes Bank settled 5.26 per cent lower at Rs 43.20 apeice after the company said it was " not aware of the source", which resulted in reports of stake acquisition by Microsoft. The bank added it is in the usual and ordinary course of its business continues to explore various means of raising capital.
Globally, most emerging market stocks were headed lower for a third day on Wednesday, as the US and China showed little signs of resolving their trade dispute ahead of a crucial round of negotiations.
Analysts further said that the result season, set to begin on Thursday will dictate the market direction.
( With inputs from IANS )