Mumbai: Staging a late recovery, the Sensex today shook off its initial weakness and ended higher by 118 points at 26,349 as bets stacked up in anticipation of a rate cut at RBI's policy review on Wednesday.
The Nifty too regained the key 8,100 mark at the close.
The monetary policy committee (MPC) is meeting tomorrow to decide on the interest rate and the final announcement is due on Wednesday. On the global front, Europe took in its stride a 'no' vote to the constitutional referendum in Italy and opened positive, which provided the momentum here.
The 30-share Sensex after shuttling between 26,390.80 and 26,125.35 settled higher by 118.44 points, or 0.45 per cent, at 26,349.10. The gauge had lost 422 points in the previous two sessions on foreign fund outflows amid weak global cues.
The NSE Nifty ended up by 41.95 points, or 0.52 per cent, at 8,128.75 after moving in a range of 8,141.90 to 8,056.85.
The rate cut prospects brightened after the sharpest contraction in services PMI in three years opened up room for RBI to lower rates. A better trend in European shares lifted mood.
"With rate cut expectations running high ahead of RBI meet this week, risk appetite improved, especially in rate sensitive stocks forcing short covering. Sentiment was also helped by European markets swinging higher after Italian referendum," said Anand James, Chief Market Strategist, Geojit BNP Paribas Financial Services.
"Expectations of populist measures aimed at softening demonetisation worries are also allowing markets to be forward looking now."
Caution prevailed due to muted regional indices after Italian Prime Minister Matteo Renzi's resignation in the wake of a heavy referendum defeat sparked worries about political instability in the euro zone and beyond.
The Nikkei India Services Purchasing Managers' Index (PMI), which tracks services sector companies on a monthly basis, stood at 46.7 in November, down from 54.5 in October.
Among bank stocks, SBI, HDFC Bank, ICICI Bank and Axis Bank ended 0.90 per cent higher as participants created fresh positions ahead of the RBI policy review.
Shares of IT exporters, however, traded with a negative bias as the rupee strengthened against the dollar after falling to an all-time low of 68.86 last month. TCS, Wipro and Infosys all fell by up to 1.68 per cent.
On the sectoral front, BSE auto index rose by 1.92 per cent, metal 1.52 per cent and FMCG 1.36 per cent.
Broader markets too showed a better trend, with the mid-cap index rising by 0.66 per cent and small-cap 0.26 per cent as investors made fresh purchases.
Foreign portfolio investors (FPIs) sold shares worth a net Rs 190.52 crore last Friday, showed provisional data.
Overseas, key indices in Japan, Shanghai and Hong Kong dropped by up to 1.21 per cent. In Europe, Frankfurt's DAX surged 1.73 per cent and Paris CAC 1.34 per cent while London's FTSE was up 0.72 per cent in their late morning trade.