The Sensex and the Nifty rose on Friday for the first session in six as lenders such as ICICI Bank gained after lower-than-expected inflation data reinforced hopes the RBI would start cutting interest rates in January.
India's wholesale inflation cooled to its weakest pace in 10 months in November, a positive sign for the struggling economy, but probably not a big enough slowdown to persuade the central bank to cut interest rates next week.
Investors are now waiting for the Reserve Bank of India's rate decision on Tuesday. Although the central bank is not expected to ease policy then, traders said they could cut the cash reserve ratio or sound more dovish on inflation.
"Demand driven inflation has come down to extremely low levels, so a rate cut in January is a given now," said Sandip Sabharwal, CEO-PMS, Prabhudas Lilladher, referring to an action that was imminent.
Now the key thing is to watch whether the RBI thinks out of the box and cuts rates in December itself, added Sabharwal.
The Sensex rose 0.46 percent, or 87.99 points, to end at 19,317.25, but ending 0.55 percent lower for the week.
The Nifty rose 0.48 percent, or 28.10 points, to finish at 5,879.60, although still down 0.47 percent for the week.
Stocks in rate-sensitive sectors such as banks and real estate led the gainers on rising hopes the RBI would move towards easing interest rates starting early next year.
ICICI Bank gained 1.32 percent, while State Bank of India ended 2.55 percent higher.
In the real estate sector, DLF rose 1.35 percent while D B Realty gained 4.56 percent.
Tata Motors Ltd rose 1.46 percent, up for a second day, after its key Jaguar Land Rover subsidiary reported higher-than-expected sales at 34,649 vehicles in November.
Capital goods maker, Larsen & Toubro gained 1.46 percent after the Indian cabinet approved the creation of a special panel on Thursday to speed up the implementation of big-ticket infrastructure projects.
Fertiliser shares gained after the government approved a new policy to encourage investment in urea manufacturing, in a move seen expediting $6.5 billion in projects that have been held back.
National Fertilizers Ltd rose 2.1 percent, Rashtriya Chemicals and Fertilizers Ltd gained 2.3 percent, while Chambal Fertilisers and Chemicals ended 0.8 percent higher.
However, among stocks that declined, Hindustan Unilever fell 0.6 percent, extending declines for a third day, on concerns that it may face higher royalty payments to its parent Unilever Plc .
Drugmaker Cipla fell 0.96 percent, down for a fourth day on profit-taking after it touched an all-time high of 423 rupees on December 11.