It rose just 13 percent in 2004, ranking it among the worst performers in Asia, but it has surged 56 percent from its May 17 low after the surprise election of a communist-backed government.
"There is all-round buoyancy. There will be fresh allocations from foreign funds starting January, and we expect companies to report good quarterly numbers next month," said Gopi Shenoy, assistant vice president of IDBI Capital Markets.
Overseas funds ploughed half a billion dollars into Indian shares in the second half of December, despite forecasts of a holiday slowdown, boosting expectations for the new year.
Banks rose on hopes of consolidation among public-sector banks and reforms to raise foreign holdings in private banks.
State Bank of India rose 3 percent and ICICI Bank, the biggest private-sector bank, rose 1.9 percent.
Also pleasing the optimists was better-than-expected economic data, which showed the economy grew 6.6 percent in the year through the July-September quarter and inflation fell to 6.5 percent in the year to December 18 from 6.73 percent a week before.
The bonds dropped, with the yield on the actively traded 7.38 percent 2015 bond rising nearly 10 basis points to 6.6631 percent, as the government said it would go ahead with plans to sell bonds worth 70 billion rupees next week.