The Sensex rose for the second week in August as they closed half a per cent higher on Friday, lifted by firm Asian stocks and led by gains in top lender State Bank of India, which recorded a fresh all-time high.
Traders said the outlook for the market was bullish.
A drop in European shares capped the gains.
SBI rose as much as 3.4 per cent to 2,879.95 rupees, its highest level ever, as investors gave a thumbs up to its June quarter earnings which beat market estimates.
The 30-share BSE index rose 0.52 per cent or 93.13 points to 18,167.03 points, taking gains in the week to 0.1 per cent. Two-thirds of its components advanced.
"Market will be rangebound until we have fresh triggers to drive it up, now that earnings season nears close," said Nitin Rakesh, CEO of Motilal Oswal's asset management business.
" But the sentiment is definitely bullish and capital flows into our country will continue. We had positive surprises in the last leg of earnings season. Monsoon is no longer a worry either."
The benchmark index is up 1.7 per cent so far in August, and has risen 4 per cent in 2010, with foreign funds pumping in $11.3 billion in Indian equities.
So far in the year, the benchmark index has outperformed broader indexes such as MSCI's measure of Asian markets other than Japan and emerging markets index which have dropped 3.2 per cent and 1.3 per cent respectively.
Oil explorer Cairn India rose as much as 5.1 per cent to an all-time high of 358 rupees, as a source told Reuters that India-focused Vedanta Resources will take a 51 per cent stake in the Indian firm for $8 billion to $8.5 billion in a deal that is likely to be announced by Monday.
Sterlite Industries, an unit of Vedanta, dropped 4.3 per cent.
"This is a knee-jerk reaction. Sterlite has huge cash balances which the group may use to fund Cairn India stake buy," said Deven Choksey, managing director and CEO of KR Choksey Shares.
Tata Steel rose as much as 4.1 per cent as investors ignored the dull outlook and the quarterly net profit which fell short of estimates.
"While Corus results slightly disappointed, it was more than compensated by strong profitability at the India operations," Goldman Sachs said in a note reiterating a "buy" rating on the stock.
"While we expect 2QFY11 to be relatively weak, due to seasonal softening of demand and cost push, we expect prices to start firming up by early Sep leading to a strong 2HFY11," the investment bank said.
The stocks erased some early gains and closed 1.4 per cent higher.
Advancing shares thrashed declining ones in the ratio of 1.1:1 while 469 million shares changed hands on the BSE.
SBI closed 2.4 per cent higher at 2,849.40 rupees.
Other financials also climbed, with sentiment boosted by SBI's results and an optimistic demand outlook for loans backed by robust economic growth expectations in Asia's third-largest economy.
Leading private lenders ICICI Bank and HDFC Bank firmed 1.2 per cent and 0.6 per cent respectively. Mortgage lender Housing Development Finance Corp rose 0.2 per cent.
India's No.2 mobile operator Reliance Communications dropped 2.9 per cent ahead of its quarterly earnings announcement. After the market closed, the firm reported a quarterly net profit of 2.51 billion rupees, sharply laggins estimates.
Cigarette-to-hotel business ITC rose nearly 2 per cent, riding on higher domestic consumption in the world's second-fastest growing major economy.
Energy giant Reliance Industries gained 0.7 per cent after declining 5.3 per cent over last seven sessions.
The 50-share NSE index rose 0.7 per cent to 5,452.10.
Elsewhere in the world, the FTSEurofirst 300 index dropped 0.6 per cent by 1023 GMT, while Asian markets other than Japan were up 0.9 per cent.