Sentiment also got a boost after the Supreme Court allowed resumption of mining in Goa, sending shares in miners such as Sesa Sterlite surging.
FII's, who have pumped in nearly $4.8 billion into Indian shares so far this year, were net buyers worth Rs. 430 crore ($71.20 million) on Thursday, snapping three days of a selling streak totalling Rs. 569 crore ($94.21 million), as data showed.
The stock markets were unlikely to sustain strong gains given the Nifty is already up 8.2 per cent so far this year while caution is likely to prevail ahead of the outcome of the elections next month.
We think markets will trade range-bound, and do expect profit-taking at higher levels. We have seen even FIIs have started booking profits. So, one should be careful in entering a position.
The Sensex closed 0.6 per cent higher at 22,764.83. The Nifty ended 0.56 per cent higher at 6,817.65.
Banking shares led the gains, with the sector's sub-index up 1.34 per cent on hopes banks will show sturdier earnings when they start reporting their financial results later this week.
Concerns about potential mark-to-market losses in their bond portfolios were also calmed after the central bank fully sold the Rs.20,000 crore ($3.31 billion) worth of debt on offer on Thursday without any devolvements.
Axis Bank rose 2.67 per cent while ICICI Bank gained 1.52 per cent. Both the banks are set to report their earnings on Friday.
PSU banks also gained, with State Bank of India ending up 2.72 per cent.
A ruling by the Supreme Court allowing mining from Goa of up to 20 million tonnes iron ores a year boosted miners. Sesa Sterlite rose 4.64 per cent, its biggest single-day gain since December 9, 2013.
Capital goods and auto stocks also gained sharply as dealers cited strong buying by foreign institutional investors. Larsen and Toubro gained 4.2 per cent while Mahindra & Mahindra gained 3.6 per cent.
Among other gainers, Natco Pharma gained 7.5 per cent after U.S. Supreme Court Chief Justice John Roberts denied a request by Teva Pharmaceutical Industries Ltd to stay a lower-court ruling in a patent case that favoured the developers of generic versions of Teva's multiple sclerosis drug.
Shares in AstraZeneca India gained 4.3 per cent after the Sunday Times newspaper reported Pfizer Inc approached its parent AstraZeneca PLC to propose a 60 billion pound ($101 billion) takeover.
However, Wipro plunged 6.8 per cent after the company's IT revenue guidance was seen as below estimates by some analysts.