The Sensex posted its biggest daily percentage gain in almost two weeks on Friday as interest rate-sensitive stocks such as State Bank of India rallied on expectations the RBI will ease monetary policy next week.
Maruti Suzuki India Ltd rose 4 percent after the country's biggest carmaker said its third-quarter profit more than doubled while posting healthier operating margins than expected.
Shares in banks, auto makers, and property developers have rallied since last month on expectations the Reserve Bank of India will start cutting interest rates this year, starting with the policy review on Tuesday.
Most economists expect the RBI to cut India's key lending rate by 25 basis points on Tuesday, for the first time in nine months.
"RBI would be cutting rates on January 29 and it would be a big positive for the market. Quantum of rate cut should not matter," said Nagji K Rita, Chairman & MD, Inventure Growth & Securities.
Nifty will be making a new high this year after the reversal of interest rates, Rita added.
The Sensex rose 0.9 percent, or 179.75 points, to end at 20,103.53, its biggest daily gain since January 14.
The Sensex gained 0.32 percent for the week, its second weekly gain in three weeks
The Nifty rose 0.92 percent, or 55.30 points, to end at 6,074.65, and rose 0.17 percent for the week.
Banks were among the leading gainers for the day. State Bank of India rose 2.22 percent, while ICICI Bank Ltd gained 0.73 percent.
Bank of Baroda surged 5 percent and Bank of India gained 4.5 percent on valuations that were considered attractive after profit concerns hit the shares earlier this month.
Property shares that would benefit from lower rates also gained. DLF Ltd rose 3.2 percent, while Unitech surged 7 percent higher, recouping its 7 percent fall on Thursday.
Shares in Reliance Communications Ltd gained 7.62 percent after The Economic Times newspaper reported the company was in talks to sell a stake in its mobile tower unit to Reliance Industries Ltd .
Shares in ITC Ltd gained 0.8 percent to 299.75 rupees. The stock has gained 9.6 percent in the last two weeks, moving towards its record high hit on December12, as investors felt fears of a potential duty on cigarettes had dragged the stock down excessively.
Exide Industries shares fell 2.3 percent, down for the second day after Dutch banking and insurance group ING said it was selling its 26 percent stake in an Indian insurance venture to local partner Exide.
Shares in Reliance Industries ended 0.4 percent lower as recent recommendations on a revision in local gas prices was seen benefiting state-run upstream companies such as Oil and Natural Gas Crop and Oil India with immediate effect.
(Additional Reporting by Abhishek Vishnoi; Editing by Anupama Dwivedi)