Extending gains for the third consecutive session, the S&P BSE Sensex settled the day 174 points higher but a tad below its crucial psychological level of 25,500, while the broader CNX Nifty managed to hold its key 7,750-mark.
Markets rose as investors have by now priced in an expected hike in US interest rates.
The US Federal Reserve is widely expected to announce a hike in interest rates when its two-day policy-setting meeting concludes later tonight.
It would be the first rate hike in US in nearly a decade, signalling the beginning of an end of quantitative easing that supplied ample liquidity to emerging markets including India.
Now that rate hike is mostly a done deal after more than a year of anticipation, investor will shift focus on how the Fed might opt to pace its tightening cycle next year. The central bank has hinted that it intends to raise rates gradually.
The 30-share index ended at 25,494.37, up 173.93 points, while the broad-based 50-share index quoted 7,750.90, up 50.00 points at close.
Market breadth remained positive with 23 of the 30 Sensex components ending the day in green.
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"The market has already priced in a rate hike and we have corrected significantly, the problem will be if the Fed doesn't hike rates tonight," told Gaurang Shah, vice president at Geojit BNP Paribas to Reuters.
"We won't see a runaway rally, we might see some minor sell-offs, but everyone is waiting for this (Fed meet) to get over," the expert added.
Shares of auto companies reacted mixed to the news that Supreme Court has ordered a temporary ban on the sale of large diesel cars in New Delhi. Stock of Mahindra & Mahindra lost 5 per cent, while that of Tata Motors and Ashok Leyland witnessed mild rebound after recent losses.
Sugar stocks hogged limelight and made significant gains after a bill seeking to raise the sugar cess ceiling from Rs 25 to Rs 200 per quintal was passed by the Lok Sabha on Tuesday.
The government said it will help cane-growers who are in crisis as it can facilitate rehabilitation and modernisation of sugar factories.
Among Asian markets, China's Shanghai Composite added 0.17 per cent. Hong Kong's Hang Seng finished 2.01 per cent higher, while Japan's Nikkei gained 2.16 per cent.
Overnight, US stocks rose broadly on Tuesday but ended far off their session highs ahead of Wednesday's interest rate decision from the Federal Reserve.