The Sensex recovered by 207 points to 37,852, taking comfort from positive inflation numbers coupled with emergence of buying by domestic institutional investors.
The Nifty too rose 80 points to close at 11,435.
Besides strengthening rupee, encouraging earnings by some blue-chip firms including Tata Steel and Sun Pharma also helped in building positive sentiments, brokers said.
The Sensex had lost 379.47 points in the previous two sessions.
Sun Pharma (6.91%), YES Bank (2.87%) and ICICI Bank (2.17%) were the top Sensex gainers. The Sun Pharma stock rose after the firm reported a consolidated net profit of Rs 982.51 crore for the quarter ended June 30, 2018 compared with net loss of Rs 424.92 crore for the corresponding period of 2017-18.
Tata Steel stock also gained in the Sensex list, surging 1.70 per cent after the company said its consolidated net profit jumped more than two-folds to Rs 1,933 crore in the April-June quarter of 2018-19 compared to Rs 921 crore during the same period a year ago.
Meanwhile, the rupee closed at 69.90 level against the dollar compared with Monday's close of 69.93.
Intra day, the currency fell past the key 70 level to hit a fresh all time low of 70.08.
Market breadth was marginally negative with 1302 stocks closing higher compared with 1390 ending in the red on BSE.