Buying in IT, energy and fast-moving consumer goods stocks pushed the markets higher, but caution among investors ahead of the expiry of monthly derivatives contracts limited the upside.
Among the prominent advancers on the 50-scrip index were Adani Ports, Tech Mahindra, Infratel, Zee Entertainment Enterprises (ZEEL) and Infosys, finishing between 1.91 per cent and 2.24 per cent higher.
The Sensex and Nifty jumped as much as 391 points and 104 points during the session respectively.
However, the key indices lost a majority of those advances by the end of the session as caution prevailed among investors ahead of expiry of monthly derivatives contracts. The derivatives (futures & options) contracts for the month of December expired at the end of the session.
The Nifty IT index - comprising information technology stocks - ended 1.4 per cent higher on Thursday, after having shed 4.8 per cent over the past six consecutive sessions on appreciation in the rupee against the dollar.
Strength in the rupee against the greenback limits profitability for exporters such as IT companies. The rupee declined by as much as 19 paise against the dollar on Thursday, amid demand for the greenback by importers and banks. The rupee is set to finish calendar year 2018 with a depreciation of around 10 per cent against the dollar.
The domestic equity markets tracked a mildly positive trend in Asian peers, as the US government's attempt to mend its relationship with the Federal Reserve brought some much-needed relief to investors. The Dow Jones Industrial Average surged more than 1,000 points for the first time overnight, after a Mastercard report said US 2018 holiday sales rose 5.1 per cent, pointing to the strongest gain in six years.
White House economic adviser Kevin Hassett said Fed chairman Jerome Powell's job was not in jeopardy, in an attempt to soothe investor sentiment, which has taken beating over the last few weeks.
Analysts say they expect only modest upside going forward. "Markets will track global sentiment and till the general elections next year, we may not see huge movements either side," news agency Reuters quoted Mugilan K, deputy manager of research at Cholamandalam Securities, as saying in a report.
The government is set to release Rs. 28,615 crore ($4.07 billion) towards a fresh tranche of state-run bank recapitalisation before the year-end, Reuters reported citing sources. That was in line with its plan to inject a total of Rs. 2.11 lakh crore into state-run lenders in a bid to tackle bad loans.
Meanwhile, the Reserve Bank of India (RBI) on Wednesday announced formation of an expert panel headed by former governor Bimal Jalan. The committee would decide on the appropriate size of reserves that the central bank should maintain and the dividend it should give to the government, it noted.
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