The BSE Sensex rallied 255 points to close at nearly three-week high of 26,218.91 while the NSE Nifty hit the 8,000-level on Friday on rate cut hopes after the US Fed decided not to raise rates for now.
Furthermore, the rupee rebounding 74 paise to 65.72 against the dollar (intra-day) and a mixed trend in global markets buoyed sentiment.
The 30-scrip Sensex started off on a strong footing and retook the crucial 26,000-mark to hit the day's high of 26,471.82 on intensified buying.
But profit-booking at higher levels and a lower opening at European markets contained initial gains, with the index slipping to a low of 26,130.36 before ending higher 254.94 points, or 0.98%, at 26,218.91 -- its highest closing since August 31.
The gauge has now gained 512.98 points in the previous two sessions.
Stock exchanges remained closed Thursday on account of Ganesh Chaturthi.
The NSE Nifty after breaching the 8,000-mark hit a high of 8,055.00, the highest since August 28, but succumbed to profit-booking and surrendered part of gains to close the session at 7,981.90, up 82.75 points, or 1.05%.
On a weekly basis, the BSE Sensex rallied 608.70 points, or 2.37%, while the Nifty zoomed 192.60 points, or 2.47%, posting gains for the second straight week.
Brokers said mood got a big lift after Fed's decision to maintain status quo gave RBI some headroom to loosen rates at the upcoming policy review on September 29.
Positive macro numbers helped, with retail and wholesale inflation falling to new lows in August and IIP numbers for July coming in better than estimated.
Interest-sensitives led by banking and realty were in the limelight as major players were seen widening their bets, thus helping key indices to hit their crucial levels during the
Axis Bank emerged as the top gainer in the banking space, up 4.70%, followed by SBI, HDFC Bank and ICICI Bank.
The ones that lagged included Tata Motors, Bajaj Auto, GAIL, Hindalco, Cipla and Hind Unilever, among others.
Sector-wise, the BSE realty index jumped the highest surging 3.16%, followed by bankex, PSU, healthcare, oil & gas and power.
Buying activity by retail investors also passed on to broader markets, with small-cap and mid-cap indices ending up to 1.11% higher.
Foreign portfolio investors (FPIs) net sold Rs 337.27 crore worth of shares on Wednesday, provisional exchange data showed.
Globally, other Asian markets ended mixed with Shanghai Composite ending 0.38% higher as Hong Kong's Hang Seng rose 0.30% and Japan's Nikkei shed 1.96%.
European markets were showing signs of weakness in their early trade as the Federal Reserve's decision to hold off raising interest rates stoked concerns about global growth.