Sensex ended 575 points higher on Wednesday led by sharp gains in frontline stocks such as Infosys, HDFC Bank, HDFC, ICICI Bank and TCS.
The Nifty50 reclaimed its crucial resistance level of 7,900 to close at 7,935, scoring its biggest intraday percentage gain since february 15th.
The gains were supported by a rally in IT, realty, power, capital goods, banks and auto stocks.
Going by the buzz on the Street, here are the four factors supporting the rally in domestic equities:
Morgan Stanley upgrades India to 'overweight': Morgan Stanleyon Wednesday upgraded the Indian market to 'overweight' from 'equal weight' on attractive valuations compared with other emerging markets, strong macros, a recovery in earnings growth and likely easing of interest rates by the Reserve Bank of India.
The investment bank did not specify any particular target for the index, but maintained its positive stance which could act as a sentiment booster for the market.
India's macro-economic climate is well placed with a little deflation threat, favourable demographics, low overall debt and possibility of productivity-enhancing reforms, Morgan Stanley said in a note. Further, monetary easing will also aid recovery.
Morgan Stanley's India Economist Chetan Ayha believes there is room for further easing in monetary conditions. He expects RBI to lower interest rates by another 50 bps in F2017.
US macro data lifts global stocks: The domestic market rallied in line withglobal markets after US home sales data supported the consensus view that the economy may be strong enough for the Federal Reserve to raise interest rates in the coming months.
The US market closed 1 per cent higher after comments from various US Fed officials signalled that the chances of a rate hike in June or July look plausible. At a time when most of the developed economies have zero interest rates or negative interest rates, a rate hike can come as a signal of growth coming back into the world's largest economy.
Good monsoon forecast: A good monsoon is seen as one of the biggest triggers for a rally in the domestic equity market. If rain gods smile this summer, there is a possibility that the domestic market could well deliver double-digit returns in the rest of 2016.
On Tuesday, Skymet predicted 'above normal' monsoon on the back of a warning announced by the Bureau of Meteorology (BoM), Australia. Skymet sees monsoon at 109 per cent of the long period average (LPA) of 887 mm for the four months from June to September, versus the initial estimate of 105 per cent. August rainfall is seen at 113 per cent and September at 123 per cent.
Technical liftoff: The Nifty50 closed near its crucial support level of 50-day EMA on Tuesday and a chance of a technical bounceback was on the cards. The index formed a 'Hammer' like pattern on the daily candlestick charts in the previous trading session.
Looking back, the last time the index had made a 'Hammer' pattern after four sessions of negative close was earlier this month on May 6. At that time also, the index took support near its 50-day EMA and rallied over 200 points.
"If Nifty50 crosses the resistance zone of 7,800-7,840, the bearish sentiment is likely to reduce and the index may test the 7,940 level, which is the next important resistance before it hits the 8,000 level," Rohit Gadia, Founder & CEO, CapitalVia Global Research, told ETMarkets.com.
"Both the K% moving average and D% moving average of the stochastic indicator are still moving downwards which is bearish indication. Overall, we expect the market to trade in the 7,700-7,800 range and remain volatile. Unless it manages to break this zone, the possibility of a sustained trend is very less," he said.