During trading, the 30-share BSE Sensex jumped 897.77 points or 1.61 per cent to reach 56,566.80. However, it lost most of its gains and ended up just 33.20 points or 0.06 per cent higher at 55,702.23.
Similarly, the NSE Nifty closed at 16,682.65, up 5.05 points or 0.03 per cent marginally.
Tech Mahindra was the highest gainer of 4.07 per cent in the Sensex. Apart from this, Infosys, HCL Technologies, Tata Steel, Wipro, ITC, HDFC, TCS, Kotak Mahindra Bank and ICICI Bank were among the top gainers.
On the other hand, IndusInd Bank, Sun Pharma, Nestle, UltraTech Cement, Reliance Industries, PowerGrid, Bajaj Finserv and Titan fell up to 4.32 per cent.
In other Asian markets, Hong Kong closed lower, while Shanghai was up marginally. Markets in Japan and Korea were closed for the holidays.
Stock markets in Europe were trading with gains in the afternoon session.
The Federal Reserve on Wednesday raised its prime short-term interest rate by half a percentage point to control inflation.
Federal Reserve Chairman Jerome Powell, however, ruled out a 0.75 percent hike at the next meeting. This brought relief to Wall Street.
Vinod Nair, Head of Research, Geojit Financial Services, said, “The fear of aggressive rate hike by the Federal Reserve was the main reason for global volatility for the past few days. The Fed eased investor concerns by raising half a percentage point, leading to a rally in global markets.
However, the domestic market lost its gains towards the end of the day after selling in US futures, he added.
Mitul Shah, Head of Research, Reliance Securities said that the US stock markets rose strongly after the US Federal Reserve indicated a softer stance on interest rate hikes.
On Wednesday, the BSE Smallcap fell 0.32 per cent, while the Midcap index was down 0.21 per cent.
Talking about the sector, BSE Power was the biggest gainer of 1.94 per cent. This was followed by 1.86 per cent growth in IT, 1.81 per cent in technology and 1.51 per cent in public utility services companies.
On the other hand, realty fell 1.57 per cent, health care 0.56 per cent, daily-use goods companies 0.51 per cent and energy 0.43 per cent.
The Reserve Bank of India has increased the key policy rate repo to 4.40 percent to control inflation. Due to this, the domestic stock markets fell on Wednesday.
Meanwhile, Brent crude, the international oil standard, rose 0.27 per cent to $110.4 per barrel.
Foreign institutional investors sold shares worth a net Rs 3,288.18 crore on Wednesday, according to provisional stock market data.