The BSE Sensex gained nearly 2 percent on Friday to mark its biggest single-day gain in nearly a month as Reliance Industries surged after the government allowed it to charge higher prices for gas from April.
Software services exporters also rallied after Accenture Plc (ACN.N) said it expects its consulting business to turn the corner as orders rise, building on strength in its outsourcing unit while reporting better-than-expected quarterly results.
Shares had fallen on Thursday after the Federal Reserve's decision to start a limited reduction in bond purchases sparked fears of foreign investor selling, like the one in summer when markets were roiled by similar fears.
However, overseas investors bought 22.64 billion rupees worth of shares on Thursday.
Foreign investors' strong buying this year, totalling more than $18 billion in net investments, has been key to the stock market's performance and was behind the indexes' surge to record highs on December 9.
"Indian markets have always been very dependent on foreign flows for continuation of the uptrend. My apprehension, however, is what would happen to flows when tapering actually starts next month," said R. K. Gupta, managing director of Taurus Mutual Fund.
The benchmark BSE Sensex rose 1.79 percent, or 371.10 points, to end at 21,079.72 marking its biggest single-day gain since November 25. It gained 1.8 percent for the week.
The broader Nifty rose 1.74 percent, or 107.60 points, to end at 6,274.25, marking its highest weekly close since November 1. It gained 1.7 percent for the week.
Reliance Industries Ltd (RELI.NS) surged 4.8 percent, marking its biggest single-day gain since May 27 after the government allowed the company to charge higher prices for gas from April.
The move came after the company offered financial guarantees to the government to settle any claims against it over a shortfall in its gas output.
Shares in software services companies gained after Accenture Plc's (ACN.N) results. Tata Consultancy Services Ltd (TCS.NS) gained 1.9 percent, Infosys Ltd (INFY.NS) (INFY.BO) rose 1.1 percent, Wipro Ltd (WIPR.NS) jumped 3.7 percent and Tech Mahindra Ltd (TEML.NS) advanced 2.9 percent.
Infosys made a record high at 3,573 rupees and is poised to overtake ITC Ltd (ITC.BO) (ITC.NS) as the stock with biggest weighting in the BSE index and the NSE index.
Shares in sugar companies rose after the federal cabinet approved a scheme providing interest-free loans to sugar mills as part of a bail-out package.
Bajaj Hindusthan Ltd (BJHN.NS) rose 2.8 percent, Shree Renuka Sugars Ltd (SRES.NS) ended higher 1.3 percent and Balrampur Chini Mills Ltd (BACH.NS) gained 2.2 percent.
Maruti Suzuki India Ltd (MRTI.NS) ended higher 1.6 percent after making a record high at 1.830 rupees earlier in the day on hopes of lower raw material costs of imported parts after the U.S. dollar hit a five-year high against the yen.
However, among stocks that fell, Parsvnath Developers Ltd (PARV.NS) dropped 1.2 percent on going ex-dividend.