The 50-share Nifty jumped above the key 6,100 mark - its highest level in more than two years - on Tuesday. However, gains were capped after three days of rally.
The Sensex traded 44 points or 0.22 per cent higher at 20,146 while the Nifty advanced 16 points to 6,098 as of 09.50 a.m.
The rupee, however, gained sharply against the dollar after the government hiked import duty on gold to contain rising current account deficit. It traded at 53.40, its highest level since October 2012. (Read: Rupee nears three-month high)
The government's recent focus on fiscal consolidation, the likelihood of a rate cut by the Reserve Bank later this month and better than expected December quarter earnings are likely to support markets at current levels, analysts said.
Market analyst Sarvendra Srivastava said bullish setups are intact and investors can add long positions.
Banking stocks such as ICICI Bank and metals led the rally while consumer durables and IT stocks saw profit taking. On the Nifty, 33 stocks traded higher led by Asian Paints, up 2.8 per cent, while state-run power producer NTPC traded 2 per cent higher after reporting strong earnings.
Drug maker Sun Pharma and cement maker ACC were up 1.5 - 2 per cent. FMCG major HUL gained ahead of the third quarter earnings. Reliance Industries shares extended gains, rising over 1 per cent, after hitting a 52-week high on Monday.
Gas utility Gail India was the top Nifty loser, down 2.7 per cent, followed by state-run refiner BPCL, which slipped 1 per cent. IT major HCL Tech also traded 1 per cent lower. Most of these stocks saw profit taking after a sharp run up in the last few days.
Domestic carrier SpiceJet was the most traded stock on BSE 500. It gained nearly 4 per cent after it swung into profit in the December quarter. Kingfisher Airlines shares also advanced 1.4 per cent.
Reliance Communications shares gained 2 per cent on hopes of a deal with Reliance Industries for the latter's 4G rollout. (Read: Why RCom shares are up)
Pantaloon shares jumped 10 per cent after the central bank eased investment norms for FIIs and some other category of investors. (Read: Why Pantaloon shares are up)
(With inputs from Reuters)
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