Mumbai, May 7: The Sensex and the Nifty rose for the first time in four sessions on Monday, led by gains in capital goods and banking stocks, after a controversial set of provisions on taxation for foreign investors was deferred by a year.
The rupee also rose 1 per cent to close Rs 52.9 against the dollar.
Finance minister Pranab Mukherjee told Parliament the General Anti-Avoidance Rule (GAAR) would be delayed until fiscal 2013-14 and burden of proving tax evasion will lie with the authorities rather than with overseas investors.
Indian shares cut losses after the news on a day of mixed global trend following elections in Greece and France.
Although the news was seen soothing major worries about foreign flows, analysts said India's steep economic and fiscal challenges would continue to weigh on stocks.
"Investors are still nervous and the sentiment is weak in the near term with bond yields going up, little news on policy reforms and weak global cues such as lower employment reports from the US and Europe back in focus," said Sharekhan's head of research Gaurav Dua.
The Sensex rose 0.48 per cent to 16912.71 points, after earlier falling as much as 1.9 per cent. The Nifty added 0.54 per cent to end at 5114.15 points.
The controversy over the GAAR provisions and economic health concerns had weighed heavily on domestic stocks, which had fallen 3.6 per cent since the provisions were announced as part of the fiscal 2013 budget in mid-March.
Capital goods stocks were among the leading gainers today, with Larsen and Toubro surging 4.9 per cent and Bharat Heavy Electricals gaining 6 per cent.
Recouping from sharp early losses, the rupee gained an impressive 56 paise at 52.92 against the dollar to snap a four-day losing streak as hopes of strong fund flows got a boost. Treasury managers in banks said steps by the RBI regarding FCNR and export credit also lifted sentiments.
The rupee opened weak at 53.64 and logged an intra-day low of 53.76 on early sharp fall in local equities.
The local currency bounced back to a high of 52.85 before concluding at 52.92, a rise of 1.05 per cent.
"This decision of the government to delay GAAR will encourage the inflows of foreign exchange, which is a major boost for the rupee," said India Forex Adviser's CEO Abhishek Goenka.