The Reserve Bank of India (RBI) stuck to its accommodative monetary policy stance amid concerns that the resurgence in infections could derail the country's nascent economic recovery.
The NSE Nifty 50 index closed 0.92% higher at 14,819.05 and the S&P BSE Sensex rose 0.94% to 49,661.76.
The benchmark 10-year bond yield briefly rose to 6.19% after the policy decision, but fell to a low of 6.05% after the central bank announced a secondary market government securities (G-sec) acquisition programme.
"Fears of any pre-mature tightening either through rates or liquidity management by some sections of the market have been put to rest by RBI's dovish tone today," said Abheek Barua, chief economist, HDFC Bank.
The announcement of the G-sec acquisition program is likely to stabilise and support long-term yields, Barua said.
India's second wave of coronavirus infections continued to swell as the country reported a record 115,736 new cases on Wednesday.
The Indian rupee weakened to 74.55 against the dollar, hitting its weakest level since Nov. 17.
The Nifty bank index and the auto index rose 1.5% and 1.6%, respectively. ICICI Bank and Infosys were top boosts to the index, rising 1.9% and 1.3%, respectively.
Shilpa Medicare shares rose as much as 14.3% after an executive told Reuters that the drugmaker has the capacity to manufacture 100-200 million doses of a protein-based vaccine for COVID-19.
Shares of restaurant chain Barbeque-Nation Hospitality recovered early losses to rise 18% in their debut trading on Wednesday.
(Reporting by Nallur Sethuraman in Bengaluru and Savio Shetty in Mumbai; Editing by Shinjini Ganguli)
By Sethuraman N R