The BSE Sensex rallied 241 points on Monday, buoyed by the government's decision to ease foreign direct investment (FDI) norms in pharma, aviation and defence sectors.
The major reform move comes hours after Raghuram Rajan said he will not seek a second term as Reserve Bank chief and is likely to calm foreign investors, rattled by the exit of Dr Rajan, analysts say.
Aviation stocks were the big gainers, with shares of SpiceJet rising 7.36 per cent. Jet Airways and InterGlobe also closed with big gains following the government's decision to allow 100 per cent FDI in scheduled airlines.
Shares of defence equipment manufacturers such as Reliance Defence, BEL and Bharat Forge also saw strong rally, after the government said that foreign companies can own 100 per cent equity in defence firms.
Meanwhile, the rupee closed off day's low, ending at 67.30 per dollar versus its previous close of 67.08. The rupee had hit an intraday low of 67.68 per dollar today.
Analysts blamed the volatility in the rupee to the sudden exit of Dr Rajan, who was seen as a key force behind the outperformance of the rupee vis-a-vis other currencies.
Traders fears that Dr Rajan's exit may lead to capital outflows from the country at a time when global investors are already nervous ahead of the key Brexit referendum in UK on Thursday.
India has attracted over $60 billion in foreign portfolio investments since Dr Rajan's appointment in September 2013 and some investors could start getting skittish, traders warned.
The focus has now shifted to Dr Rajan's successor, with analysts saying that they do not expect any long-term impact to markets as long as his replacement is seen as credible and somebody who can defend the central bank's autonomy at a critical juncture in its history.
"The choice of successor must be based on finding a leader that will continue the new monetary project, targeting lower inflation," said the head of portfolio management for emerging Asia at PIMCO, Luke Spajic.
The Sensex closed 241 points higher at 28,866.92, while the Nifty ended up 68.3 points at 8,238.5.
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