The Nifty gained as much as 0.8 percent on Wednesday, recovering from two days of losses and nearing a key psychological level of 9,000, as a much stronger-than-expected quarterly economic growth lifted sentiment.
India's annual gross domestic product (GDP) grew 7 percent in the October-December quarter, slower than 7.4 percent in the previous quarter but much faster than the 6.4 percent expansion forecast in a Reuters poll.
The data released late on Tuesday boosted markets, while economists were puzzled, as many had expected that the government's shock crackdown on cash would have a much bigger negative impact on growth.
The market sentiment was also underpinned by a private survey on Wednesday that showed Indian factory activity expanded for a second straight month in February.
"The Indian market has been generally confident for a while," said Dipen Shah, senior vice president and head of private client group research at Kotak Securities.
"Certain triggers include optimism surrounding the proposed roll-out of the Goods and Services Tax (GST) bill," Shah said, adding that the progress of the ruling Bharatiya Janata Party (BJP) in the key northern state of Uttar Pradesh was also lifting market sentiment.
The Nifty rose as much as 0.8 percent to 8,950.25, while the benchmark Sensex gained as much as 0.9 percent to 29,001.35.
Financial stocks recovered, with the Nifty Financial Services Index rising as much as 1.2 percent, after declining for four straight sessions. Axis Bank was up 2.5 percent, Bajaj Holdings and Investment rose 2 percent and ICICI Bank gained 1.3 percent.
Among decliners, shares of manganese ore miner Moil Ltd fell to a two-month low, after the company cut prices for different grades of manganese ore for the fourth quarter, its second consecutive cut after a series of price hikes.
(Reporting By Samantha Kareen Nair in Bengaluru; Editing by Amrutha Gayathri)