ITC and Hindustan Unilever, which touched fresh 52-week highs, contributed to half the gains in the index. All sectoral indices ended higher, gaining as much as 3.85 per cent, with consumer durable, FMCG, realty and banking stocks taking the lead.
ICICI Bank, Infosys, SBI, M&M, ONGC, Dr Reddy's Lab and BHEL shares also were in demand. Financial scrips rose on value-buying after recent losses were seen as excessive.
The 30-share Sensex resumed sharply higher and remained in positive terrain through the day. It settled at 20,302.13, a rise of 143.01 points, or 0.71 per cent, clocking its fifth day of gains. Today's close was the highest since 20,498.72 points on January 4, 2011.
The wider CNX Nifty on the National Stock Exchange added 46 points, or 0.76 per cent, to end at an almost two-month high of 6,077.80.
The RBI's move yesterday to curb gold imports to slash the current account deficit was one of the reasons that helped boost sentiment in the markets, brokers said. A shift in funds to domestic stocks from the bullion and forex markets also supported the market, they added.
"The RBI tightened gold import duty to squeeze current account deficit and this improved sentiment," brokerage GEPL Capital said in a note.
Investor wealth, measured by market capitalisation of all traded companies on BSE, rose by around Rs 40,000 crore to Rs 66.32 lakh crore.
There was some activity ahead of the expiry of derivatives contracts on July 25.
Asian stocks closed sharply higher after data showed a surprise decline in US existing home sales, easing concerns that the Federal Reserve would reduce its stimulus measures.
Key indices in China, Hong Kong, Japan, South Korea, Singapore and Taiwan rose by 0.82 per cent to 2.33 per cent.
European stock markets traded marginally higher, mirroring a positive session in Asia, after officials signalled China is committed to supporting growth. Benchmark indices in UK, Germany and France were up by 0.09 per cent to 0.27 per cent.
In the domestic market, 21 Sensex stocks ended higher. The major gainers were HUL (3.19 pc), BHEL (2.23 pc), M&M (2.11 pc), SBI (2.03 pc), Sterlite Ind (1.87 pc), ITC (1.84 pc), Dr Reddy's Lab (1.79 pc), ICICI Bank (1.54 pc), ONGC (1.46 pc) and Tata Power (0.91 pc).
Declining shares included Wipro (2.23 pc) and Bharti Airtel (1.79 pc).
Among the sectoral indices, S&P BSE-CD rose 3.85 per cent, followed by S&P BSE-FMCG (1.53 pc), S&P BSE-Realty (1.42 pc), S&P BSE-Bankex (1.29 pc) and S&P BSE-PSU (0.89 pc).
The market breadth was mixed, with 1,150 shares ending lower, 1,149 shares gaining and 173 scrips ruling steady. Total turnover declined to Rs 1,632.17 crore from Rs 1,651 crore yesterday.
Foreign institutional investors sold shares worth a net Rs 406.02 crore yesterday, as per provisional data from the stock exchanges.