Bombay's benchmark Sensex index jumped to 14,028.47 points when trading began on Tuesday, topping a previous peak set in November.
India's economy has beaten expectations by growing at an annualised rate of 9.2% during July to September.
The Sensex's recovery marks a change in fortunes for the exchange, which plunged in value earlier this year.
In later trading, however, the Sensex dropped below the 14,000 mark again, closing 63.32 points, or 0.5%, higher at 13,937.65.
Market analyst Rahul Rege said the rising stock index was the result of strong economic fundamentals and more players investing their money in the market.
"Lot of money has flowed in from foreign investors in the last three months..the investor base has widened tremendously, economic growth numbers are positive and corporates have registered good results," he said.
This year, foreign institutional investors pumped nearly $9bn into India.
Asia's fourth-largest economy has grown at an average of 8% in the last three years. But critics say the benefits have not reached the poor fast enough.
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