The Sensex, after a firm opening, slipped to a low of 16,900 post RBI's policy review.
However, markets took it in its stride and rebounded smartly to a high of 17,322.
The index finally ended up 316 points at 17,255. Nifty gained 93 points to 5,192.
The Reserve Bank of India on Tuesday raised repo rate, the rate at which it lends to banks, by 25 basis points to 8.5%.
However, the cash reserve ratio remains unchanged at 6% and reverse repo rate too is unchanged at 7.5%. RBI has brought down the GDP forecast from 8% to 7.6%, while retaining the inflation forecast of 7%.
The central bank has also deregulated the bank deposit (savings) rates with immediate effect, subject to certain conditions.
This is likely to push up cost of funds, effecting bank stocks negatively.
The RBI has stipulated that each bank will have to offer an uniform rate of interest on savings bank deposits up to Rs one lakh. Above that, it may provide differential rates of interest.
""It looks like we have now reached peak of the interest rate cycle and once inflation starts decelerating, we can expect the policy stance to shift towards addressing growth concerns," said Ashutosh Datar, IIFL.
Markets
'I was wrongly advised by my bank relationship manager'
RBI frees savings bank interest rate, depositors may get more
Write off power discoms' losses: Ministry to states
Markets pare gains, banks weigh
World's top 20 RICE producing nations