At 2:31 pm, the Sensex traded 2.17 per cent or 795.31 points higher at 37,496.47 and the NSE Nifty 50 index was up 2.10 per cent or 227.90 points at 11,057.25.

"Government announcements are in the right direction and from here on the Sensex and Nifty are likely to rise further," AK Prabhakar, head of research at IDBI Capital, told NDTV. "I think the Sensex and Nifty will touch record highs by December-end," he added.

All but one of the sectoral gauges compiled by the National Stock Exchange were trading higher, led by a 3.3 per cent gain in the Nifty PSU Bank index.

Shares in state-run banks surged after the government on Friday announced that it will release Rs 70,000 crore of recapitalisation funds upfront for PSU lenders, which was earlier to be provided to them during the course of the year. Central Bank of India, Indian Bank, Allahabad Bank and Jammu & Kashmir Bank were among the top percentage gainers in the PSU banking space, up between 5 per cent and 9.5 per cent.

The Nifty Financial Services, Nifty Private Bank, Nifty Media and Nifty Realty sector gauges also rose between 2.9 per cent and 3.4 per cent.

On the other hand, the Nifty Metal index was the top percentage loser, down 1.6 per cent, as the US-China trade war escalated. Last Friday, US President Donald Trump additional duty on some $550-billion of targeted Chinese goods, hours after China unveiled retaliatory tariffs on $75 billion worth of American goods.

Mid- and small-cap shares were also witnessing buying interest, with the Nifty Midcap 100 index rising 1.4 per cent and the Nifty Smallcap 100 Index climbing 2 per cent.

Yes Bank was top gainer in the Nifty 50 basket of shares. The stock rose 5.8 per cent to Rs 62.70. Yes Indiabulls Housing Finance, Adani Ports, HDFC, HDFC Bank, Bajaj Finance, Larsen & Toubro, UltraTech Cement, and ICICI Bank were also among prominent gainers, up 3.3-6 per cent each.

On the flipside, JSW Steel, Tata Steel, Vedanta, Hero MotoCorp, Hindalco, Sun Pharma and Coal India were among the losers.