The Nifty rallied by a huge 144 points to end the day at 5592 points, while the Sensex closed the day higher by 390 points (provisional).
The rupee also saw sharp gains of 61 paise against the dollar and was last trading at 66.41 to the dollar, after new RBI governor announced a slew of measures on Wednesday to ease worries over the falling rupee.
Bank stocks were the stars in trade as the RBI allowed banks to raise foreign debt to the extent of 100 percent of their tier I capital, as against the 50 per cent currently.
The Bank Nifty which has been hammered out of shape in the recent weeks gained as much as 8 per cent in trade, as investors rushed to buy banking stocks. Yes Bank rallied almost 16 per cent, while Axis Bank gained 13 per cent in trade and ICICI Bank jumped 8 per cent.
Other Nifty stocks that rallied apart from the banking stocks was DLF, Bharat Heavy Electricals, Reliance Infra, Ultratech Cement, BPCL and Jaiprakash Associates.
Software stocks came in for some selling pressure on sharp gains in the rupee. Infosys and TCS both lost more then 2 per cent as investors moved away from technology stocks to banking stocks.
Heavyweights, ITC and Reliance also joined the party with ITC up more then 4 per cent in trade.
Pharma stocks ended the day lower with Lupin, Sun Pharma and Cipla seeing some selling pressure.
Meanwhile, markets in Asia were trading higher following strong overnight gains in the US markets. The Hong Kong's Hang Sang and the Singapore Strait Times were among the gainers.