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Markets extended Friday's gains and advanced over 2% today led by buying in IT shares ahead of the Infosys results which will kick start the earnings season on Wednesday this week.
The Nifty closed at 4,980, up 92 points and the Sensex ended at 16,557, up 325 points.
Earlier in the day, the markets opened on a subdued note tracking lacklustre cues from Asia, despite progress in Europe to tackle the debt crisis.
The Nifty inched up in the mid-morning session and extended Friday's rally and touched a high of 4,991 following positive cues from Europe.
In Berlin, Germany's Chancellor Angela Merkel and Frech President Nicolas Sarkozy pledged to come up with sustainable solution to tackle the Euro-zone crisis and agreed to support the debt ridden banks.
In Asia, China's Shanghai Composite ended down 0.6% and Hong Kong's Hang Seng index closed flat, at 17,711.
European markets were trading mostly higher following gains in banking shares.
The FTSE 100 added and the CAC 40 indices were up almost 1% each and the DAX advanced 0.3%.
Back in India, the analysts said that market momentum was good and Nifty may scale to 5,000 levels.
Nandish Patel, Derivative Analyst from Sharekhan said, "The momentum will continue and market may test 5,000-5,050 in the coming days."
Going forward markets will take cues from the Index of Industrial Production data for the August on Wednesday, the Wholesale Price Index for September on Friday and the second quarter results which kick starts with Infosys numbers on Wednesday this week.
Economists expect IIP at around 5.5 per cent y-o-y for August against 3.3 per cent reported for July.
Analysts expect India Inc to report the worst quarterly results in two years as rising interest rates and high inflation will dent profitability.
Prabhudas Lilladher in the earnings preview said, "Profit after tax of Nifty 50 companies (excluding oil & gas) continues on downward trajectory and is expected to post anemic 6.8% growth y-o-y."
Prabhudas Lilladher expects revenue growth at 15.5% y-o-y and Ebitda margins (ex-BFSI) to decline by 149 bps.
Back in India, the government unveiled the new telecom policy in the afternoon. Telecom Minister, Kapil Sibal said that the new policy would allow carriers to trade and share spectrum which would ease pressure on large carriers.
Bharti Airtel bucked the two day losing streak and was up over 2%, Idea Cellular and Reliance Communication advanced 2% each.
Tata Motors was the top gainer on the Sensex, up 7% followed by Tata Power and DLF, up between almost 5% each.
Maruti Suzuki was the prominent loser, down 4% after reports that the company dismissed 10 workers who went on strike. Sun Pharma and Jindal Steel were other losers, down over 1% each.
Technology shares were leading the gains; the index was up almost 3%. Infosys that commences the results season on October 12th is expected to maintain the dollar revenue growth at 18-20% y-o-y and the EPS guidance will be revised to Rs 130-132 on the back of rupee depreciation, analysts say.
Infosys advanced over 3%, while Wipro and TCS were up 4 and 2% each.
Realty index was also on firm ground, up over 3%.
Prestige Estates and DLF were up 5%, Parsvnath Developers added 4%.
From the broader market, the midcap and the smallcap indices were down around 1% each.
The market breadth was positive, as 1687 stocks have advanced for 1083 declining stocks.
