The Sensex rose as much as 164.46 points from the previous close to 39,599.40 in early trade, and the NSE Nifty index moved to 11,839.10, up 42.65 points from its previous close. Advances were led by buying in banking, infrastructure and energy stocks. The Sensex jumped as much as 279.76 points from an intraday low of 39,319.64 touched in first few minutes of trade.
At 9:41 am, the Sensex traded 131.38 points - or 0.33 per cent - higher at 39,566.32, while the Nifty was up 32.35 points - or 0.27 per cent - at 11,828.80.
Top gainers on the 50-scrip index at the time were Power Grid, NTPC, Sun Pharma, Larsen & Toubro, Axis Bank and ICICI Bank, trading between 0.97 per cent and 1.91 per cent higher.
ICICI Bank, L&T and Reliance Industries were the top contributors to the advances in Sensex.
Market breadth was positive, with 903 stocks trading with gains on the BSE and 487 struggling with losses. On the National Stock Exchange (NSE), 1,001 stocks advanced while 554 declined.
Shares in Dewan Housing Finance Limited (DHFL) fell as much as 8.89 per cent in intraday trade on the BSE, a day after the mortgage lender said it had made a 40 per cent payment on unsecured commercial papers due on Tuesday, but vowed to pay the remaining Rs. 225 crore ($32.49 million) in the coming days.
Equities in other Asian markets retreated and the dollar inched up from three-month lows after Federal Reserve officials tempered expectations in the markets for aggressive monetary easing. Tracking overnight losses on Wall Street, Australian stocks dipped 0.15 per cent, South Korea's KOSPI shed 0.1 per cent and Japan's Nikkei retreated 0.6 per cent.
The Shanghai Composite Index edged down 0.15 per cent and Hong Kong's Hang Seng lost 0.1 per cent. MSCI's broadest index of Asia-Pacific shares outside Japan declined 0.2 per cent.
Federal Reserve Chairman Jerome Powell on Tuesday said the central bank is "insulated from short-term political pressures," pushing back against US President Donald Trump's demand for a significant rate cut. Mr Powell, however, said Fed policymakers are wrestling with questions on whether uncertainties around US tariffs, Washington's conflict with trading partners and tame inflation require a rate cut.
Mr Trump said on Twitter on Monday that the Fed "doesn't know what it is doing," adding that it "raised rates far too fast" and "blew it" given low inflation and slowing global growth.
Equity markets have rallied this month, with Wall Street shares advancing to record highs, after the US central bank was seen to have opened the door to possible rate cuts as early as next month at is policy-setting meeting last week.
The Sensex and Nifty indexes had ended 0.80 per cent and 0.83 per cent higher on Tuesday, snapping a two-day losing streak in a volatile session.