The Sensex traded in the positive zone in morning trades but slipped to a low of 16,443 after the GDP data came out.
However, short covering in select spaces helped the index to recover 271 points to a high of 16,676. Sensex finally ended up 260 points at 16,677. Nifty regained its 5,000-mark and ended up 81 points at 5,001.
The first quarter GDP growth dipped to 7.7% compared to 9.3% during the same quarter of the previous year.
Manufacturing sector growth came in at 7.2% vs 12.7% on a y-o-y basis. Industrial growth stood at 5.1% and the farm sector grew at 3.9%, according to the government data.
"Growth was very close to consensus and there are few obvious "nasties" hiding in the industry breakdown.
The acceleration in trade-exposed manufacturing is encouraging as is the steady, strong expansion in financial services.
The slowdown in construction is less pleasing at face value, but overall this robust report should leave RBI on track for one more 25 basis point hike this year," said Sean Callow from Westpac Institutional Bank, Sydney.
Global markets, however, continued to remain positive.
Europe's FTSE has surged 2.6% to 5,265. However, CAC and DAX slipped 0.3% each in trades, erasing early gains.
In Asia, Nikkei closed up 1% and Hang Seng gained 1.7% in trades.
BSE metal index surged 3.7% to 1,736. Jindal Steel, Tata Steel and Hindalco rallied 4-5% each in trades.
Realty, bankex and IT indices also moved up 2-3% each.
Reliance, HDFC, HDFC Bank, Infosys and ICICI Bank together contributed around 177 points to the Sensex's upmove. Reliance gained 3.6% at 782. ICICI Bank and Infosys were up around 2% each.
DLF, Sun Pharma, Jaiprakash Associates and Hero Motocorp were some of the other key gainers.
Meanwhile, ONGC languished through the day to end down 4.3% at Rs 263.
According to reports, ONGC's much-delayed Rs 12,000 crore follow-on public offer may open on September 20 or 27.
The red herring prospectus (RHP) is likely to be filed with market regulator Sebi on September 5.
Larsen & Toubro, ITC and Bajaj Auto also dropped into the negative zone.
"All eyes are now on RBI's monetary policy stance in the forthcoming policy meeting on 16th Sept.
This being a truncated week, Market will now open on Friday. Nifty has already gained more than 250 points in 2 trading sessions and possibility of a pullback will be higher," said Shanu Goel, Senior Research analyst-Bonanza Portfolio Limited.
BSE market breadth was positive. Around 1,821 stocks were on the advancing side, while 977 stocks declined out of 2,944 total traded stocks.
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