The BSE Sensex ended 2.1% higher on Friday, posting their biggest single-session rise in nearly nine weeks, led by gains in ICICI Bank, as risk appetite improved globally after Greece averted the immediate risk of a debt default.
However, the rise in local stocks is seen as short-lived, with the main index falling for the third week, after the ruling Congress party's loss in state elections hit hopes of renewed efforts to launch reforms and reverse a slowdown in growth.
"Ahead of the monetary policy and budget, the market is expected to have some stabilisation and that is what I am seeing right now," said Deven Choksey, chief executive at KR Choksey Shares and Securities in Mumbai.
The benchmark 30-share BSE index closed up 2.09%, its biggest rise since Jan. 10, at 17,503.24 points, with 23 of its components gaining. The index has lost nearly 0.8% this week. The markets were shut on Thursday for a public holiday.
The euro dipped and European stocks made small gains after Greece won strong acceptance for a bond swap deal that eases its path to second bailout.
"This is a bounceback. The rise is in line with the international markets, and since we were closed for a day in between we are catching up on that," said Ambareesh Baliga, chief operating officer at Mumbai's Way2Wealth Securities.
The government could announce a populous budget, which could be "disastrous" for the economy and the markets, he said.
Investors are keenly awaiting the annual budget to be presented in parliament next Friday as well as the Reserve Bank of India's monetary policy review, traders said.
ICICI Bank, the country's No.2 lender, rose 6.28% and bigger rival State Bank of India gained 3.96% on hopes of another cut to the cash reserve ratio, or the proportion of deposits that banks must keep with the central bank.
HDFC Bank, India's third largest lender by assets, also closed up 1.46%.
The RBI had cut the CRR by 50 basis points to 5.5% on Jan 24 but kept its key policy rate unchanged.
Larsen & Toubro rallied 5.24% after the engineering and construction conglomerate announced a succession plan.
The company split leadership by naming a new chief executive officer and said A.M. Naik, the current chairman and managing director, will continue as executive chairman.
Shares of Multi Commodity Exchange, which raised 6.6 billion rupees ($132 million) in an initial public offering, jumped more than 38% on their debut.
The shares closed 25.65% higher at 1,296.70 rupees.
The MSCI's broadest index of Asia Pacific shares outside Japan was up 0.92% at 4.09 p.m. (1039 GMT), while Japan's Nikkei ended up 1.65%.
The 50-share NSE index closed up 2.17% at 5,333.55. In the broader market, there were 1,076 gainers against 381 losers on volume of about 706.77 million shares.