Indian stock markets advanced Tuesday, the first trading day of the year, as sentiment was buoyed following news that lawmakers in Washington had reached an agreement to avert the fiscal cliff.

The 30-share BSE Sensex gained 0.71 percent or 137.32 points to 19,564.03 and the 50-share NSE Nifty advanced 0.71 percent or 42.05 points to 5,947.15.

Markets opened on a positive note, following the rally on Wall Street overnight. The U.S. stocks surged Monday in the last hours of trading for 2012 on news that the Congress was close to a deal to avert the $600 billion spending cuts and tax hikes that threaten to push the world’s largest economy.

The White House and Senate Republicans reached a deal Monday to avoid the fiscal cliff budget crisis just a few hours before the year-end deadline. The deal will allow tax hikes for individuals earning more than $400,00 and couples taking more than $450,00, retain unemployment benefits and postpone the spending cuts, termed the sequester, by two months.

Sentiment was also supported after the official data showed that China's manufacturing activity expanded in December for the third month in a row, suggesting that the world’s second-largest economy is reviving its growth momentum. The data released Tuesday by the China Federation of Logistics & Purchasing showed that the Purchasing Managers' Index (PMI) remained unchanged at 50.6 in December from that in the previous month.

"If the Nifty crosses the 5968 resistance today, we can see it going up further to 6015 levels. The strong trend in the market to continued buying by foreign funds," Raju Katira, manager trading at Triveni Management Consultancy Services, told the Wall Street Journal.

All the 13 sectoral indices were trading in positive territory. Capital goods and metal sectors surged 1.28 percent and 1.47 percent respectively while realty sector climbed more than 2 percent.

Banking sector shares advanced on hopes that the sector would benefit from an anticipated fall in interest rates. Indian Bank surged 4.72 percent and Bank of Indian gained 3.84 percent while Indian Overseas Bank rose 3.68 percent.

The overall market breadth was positive with 1655 advanced against 756 declines. The BSE's Midcap Index gained 1.04 percent to 7,187.07 and Smallcap Index advanced 0.87 percent to 7443.83. CNX midcap Index gained 1.01 percent and CNX IT gained 0.29 percent.