The NSE Nifty index also jumped 72.50 points to end at a new record closing high of 6,401.15. ICICI Bank, RIL and L&T led the 24 gainers in 30-share Sensex. Hindalco and BHEL clocked the best gains.
The Sensex surpassed its previous record closing level of 21,373.66 set on January 23, 2014. The gauge on Thursday also logged an intra-day new record high of 21,525.14.
The Sensex has gained 567.22 points in 3 straight days. The Nifty's previous record closing high of 6,363.90 was made on December 9, 2013.
India's current account deficit fell to USD 4.2 billion, or 0.9 percent of GDP, in December quarter of 2013-14 on the back of rise in exports and fall in gold imports.
Brokers said sentiment firmed up on optimism that a shrinking current account gap will bolster the rupee and spur overseas investors to increase holdings of Indian shares.
The rupee was trading at this year's highest level of 61.27 against US dollar when stock markets closed.
Positive cues trend in the Asian region and higher opening in Europe as investors awaited the Central Bank's interest rate decision and US data on jobless claims, further supported the domestic market surge, traders said.
Sectoraly, the BSE Realty sector index gained the most by rising 4.09 percent, followed by Power index (2.45 percent), Metal index (2.23 percent) and Oil & Gas index (2.23 percent).  However, the Healthcare index fell 0.27 percent.
"Market has hit a new high on the basis of strong FII flows as well as increasing retail participation. Normally it is seen that there is pre election rally and that is what is reflected in the levels. We feel a strong political mandate would result into increasing level of optimism and hence new levels for the market," said Motilal Oswal, CMD, Motilal Oswal Financial Services Ltd.


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