 "BSE Sensex gains 150 points; M&M surges")
Gains also tracked firm global shares after last week's tumbles, as investors hunkered down for the US Federal Reserve's meeting later this week.
The RBI kept interest rates unchanged on Monday, warning of upward risks to inflation as its currency was among the hardest-hit amid a global emerging markets sell-off. The decision had been largely expected, though analysts had seen an outside chance of a rate cut.
Investors are now keenly awaiting the Federal Reserve's outlook on its bond-buying programme on Wednesday and the pace of foreign institutional investment flows for determining the near-term direction of the market, dealers said.
"RBI so far was saying limited room for rate cuts but today it said if inflation remained subdued, there was scope for cuts," said Hemant Kanawala, head of equity at Kotak Life Insurance, who manages over $1 billion in capital markets.
The benchmark BSE Sensex rose 0.77 per cent, or 147.94 points, to 19,325.87, its highest close in a week.
The broader Nifty gained 0.72 per cent, or 41.65 points, to 5,850.05, closing above the psychologically-important 5,800 level for a second day.
Foreign institutional investors snapped a 10-day selling streak in India's index futures on Friday after they bought Rs 54.6 crore of index futures, further helping the gains.
This marked a reversal from net sales of Rs 839 crore in June as of Thursday's close.
Mahindra & Mahindra gained 4.3 per cent after agreeing to sell a majority stake in its automobile component unit to CIE Automotive SA for $116 million, while also buying a stake in the Spanish auto parts maker.
As part of the deal, Mahindra Group will merge all its auto components businesses into its Mahindra Forgings unit, to be renamed Mahindra CIE Automotive.
Lenders gained on value-buying even after the RBI kept rates on hold. Axis Bank rose 1.4 per cent, while State Bank of India ended one per cent higher.
Bank Nifty was down 4.43 per cent for June as of Friday's close.
Larsen & Toubro (LART.NS) rose 1 percent after it said the company was competing for defence contracts worth up to 80 billion rupees that would be awarded in few months.
Reliance Industries (RELI.NS) rose 1.3 percent after Kotak Institutional Equities upgraded the stock to "add" from "reduce" and raised its target price to 870 rupees from 855 rupees citing inexpensive valuations.
Orchid Chemicals & Pharmaceuticals (ORCD.NS) rose 10 percent after it said its oral formulations facility near Chennai had got U.S. FDA clearance.
Jet Airways (JET.NS) ended 1.3 percent higher on value-buying after earlier falling as much as 12.6 percent as the foreign investment regulator deferred a decision on Etihad Airways' planned 24 percent stake buy in the airline.
However, among stocks that fell, Hindalco Industries (HALC.NS) lost 1.6 percent on profit-booking after rising 12.2 percent in the previous two sessions on covering of short positions in the derivatives market.