The NSE Nifty 50 index closed up 1.03% at 11,889.4, while the S&P BSE Sensex ended 0.94% higher at 40,522.1.
MSCI said on Monday it would will implement changes in foreign ownership limits (FOL) in the MSCI global indexes containing Indian securities in November.
Morgan Stanley said in a note it expects the MSCI India index to see passive inflows of $2.5 billion following the changes. It also listed Kotak Mahindra Bank and IPCA Laboratories as potential inclusions to the index.
MSCI India's weight in the emerging market index could also rise to 8.7% from 8.1%, Morgan Stanley said.
The news helped the domestic market buck broader weakness due to worries over rising coronavirus cases globally.
"With the sharp plunge in the U.S. markets yesterday, the reparations should have been felt in India too, but the MSCI news came as a knight in shining armour," said Ajay Bodke, the chief executive at Prabhudas Lilladher Pvt. Ltd.
"The price movements seen today are essentially on the stocks that would be the largest beneficiaries from the MSCI changes."
Indian securities depositories NSDL and CSDL in April revised foreign investor ownership limits for Indian stocks, but MSCI said in June it was awaiting further clarifications from the depositories before making changes to indexes.
Kotak jumped over 11% on Tuesday, helping the Nifty private banking index rise about 3.12%. IPCA Labs gained 12.5%.
Financial sector heavyweight HDFC Ltd was the biggest loser, declining 2.1%.
Telecom operator Bharti Airtel and automaker Tata Motors are scheduled to report earnings later in the day.
(Reporting by Derek Francis in Bengaluru; Editing by Aditya Soni)
By Derek Francis