The BSE Sensex rose 2.1 percent on Thursday to a record closing high, boosted by a stellar trading debut by Coal India and a fresh round of U.S. stimulus, but some market participants warned against getting carried away.
World stocks advanced after the U.S. Federal Reserve announced a quantitative easing plan to nurse the fragile U.S. economy.
The 30-share BSE index gained 2.09 percent or 427.83 points to an all-time closing high of 20,893.57 points, data from Thomson Reuters showed. It rose to as much as 20,917.03, its highest intra-day level since January 2008.
Twenty-eight of its components closed in the green.
"Valuations are quite stretched. It makes sense to be cautious right now. It is a better idea for investors to book partial profits at these levels," R. K. Gupta, managing director of Taurus Mutual Fund.
Coal India shares gained 40 percent, beating forecasts and marking a spectacular debut as investors added to their positions after receiving fewer shares than they had sought in the heavily oversubscribed listing.
The Indian government raised $3.4 billion in India's largest ever IPO, part of a broader plan to divest stakes in state run firms over the next few years.
The benchmark index has gained 19.6 percent this year and is 300 points away from its all-time high, powered by record foreign portfolio investment in Indian stocks of $26.3 billion in 2010.
"The fourth quarter typically tends to be strong for Indian equity markets, so it's a happy situation, given the global environment that's benefitting from U.S. QE2," said Binay Chandgothia, chief investment officer at Principal Global Investors in Hong Kong.
"Valuations are expensive relative to other markets in the region but not as much as they were when the market last peaked," he said.
Energy major Reliance Industries contributed the most to the gains on the main stock index on Thursday, with a 3.7 percent rise. The stock, which has the largest weighting on the Sensex, has been a laggard and is only up 1.4 percent this year.
Financial stocks continued to rise as investors were optimistic for longer-term loan demand outlook in a fast-expanding economy. The banking sector index has risen close to 50 percent so far in 2010.
The country's No.1 lender State Bank of India rose much as 5.4 percent to an all-time high of 3,450 rupees. Top private lender ICICI Bank climbed as much as 2.2 percent to 1,265 rupees, its highest level since January 2008.
Metal makers rallied as metal prices advanced in London and Shanghai after the Fed said it planned to inject $600 billion into financial markets by buying bonds.
Tata Steel, Sterlite Industries and Hindalco rose between nearly 2 percent and 3.7 percent.
Advancing shares outnumbered declining ones in a ratio of 1.1 to 1 in the the broader market, on heavy volume of 627 million shares, fueled by active trade in Coal India.
The 50-share NSE index firmed nearly 2 percent to 6,281.80.
Markets will be open for trade in a special one-hour Diwali holiday session on Friday between 6 p.m. (1230 GMT) and 7 p.m. (1330 GMT). There will be no trade during regular market hours due to the public holiday.
Elsewhere, world equities as measured by MSCI's all-country index were up 1.2 percent at 1053 GMT, while the more volatile emerging markets index rose 1.1 percent.
STOCKS THAT MOVED
* Top mobile operator Bharti Airtel dropped 0.55 percent ahead of a quarterly earnings announcement next week.
* Mahanagar Telephone Nigam dropped 2.95 percent at 67.55 rupees as it posted a net loss of 6.05 billion rupees for the quarter ended September.
MAIN TOP 3 BY VOLUME
* Coal India on 193 million shares
* Shree Ashtavinayak on 9.3 million shares
* Karuturi Global on 7.9 million shares