The Mumbai stock exchange's 30-share Sensex index rose 70.94 points to close at 7,991.74 in low turnover of 24 billion rupees (533 million dollars) as 1,382 stocks gained and 1,043 declined.
Dealers said that although the central bank tightened a key money market interest rate by 25 basis points to 5.25 percent, it also said the economy would grow 7.0 to 7.5 percent for the year ended March 2006, compared to an April forecast of 7.0 percent.
"It did increase a short-term rate, but has also forecast a higher economic growth which has gone down well with the investors," said a fund manager with a leading domestic brokerage.
The Reserve Bank of India (RBI) raised its reverse repurchase rate, the amount in pays commercial banks for overnight deposits, in an effort to head off inflation driven by soaring oil prices.
Analysts had widely expected the move given sustained high global oil prices and after domestic gasoline and diesel prices were raised seven percent in September.
The RBI however left its long-term bank rate, at which it lends to commercial banks, at a three-decade low of six percent.
It also left the cash reserve ratio, the amount of cash banks have to keep on reserve with the central bank, unchanged at five percent.
Bank shares traded firm after the policy was announced.
State-owned State Bank of India, the country's largest bank, closed up 2.44 percent or 21.05 rupees at 884.80, while ICICI, the country's largest private bank, gained 1.16 percent or 5.80 rupees at 503.70. Shares of Reliance Industries, India's largest private company, gained 10.75 rupees or 1.42 percent to 767.55.