The Reserve Bank of India decided it will transfer the funds as recommended by the Bimal Jalan committee on the Economic Capital Framework (ECF).
"Easing fiscal deficit worries after the RBI decided to transfer Rs 1.76 lakh crore to government helped sentiments," Deepak Jasani of HDFC Securities said.
The Sensex closed at 37,641.27, higher by 147.15 points or 0.39 per cent while the Nifty settled at 47.50 points or 0.43 per cent higher at 11,105.35.
Asian stocks also rose in step with their global peers on Tuesday while safe-haven bonds retreated, after US President Donald Trump softened his tone against China and predicted the two countries would be able to reach a trade deal.
"Buying continued as hopes of economic recovery in H2FY20 picked up after the government's proactive measures and additional liquidity from RBI which will clear the near term hindrance in the market," said Vinod Nair, Head of Research, Geojit Financial Services.
He added that any further shortfall in tax collection may influence the government to channelise the surplus fund on meeting the fiscal target.
Further momentum, experts said, will be tested based on the outcome of Q1FY20 GDP during the week whereas the consensus is showing reduction in growth to 5.7 per cent due to weak investment and slowing consumption.
( With inputs from IANS )