The BSE Sensex rose more than 2 percent to new seven-month highs on Friday after the government announced a hike in diesel prices and after the Federal Reserve announced a new asset purchase programme.
State-owned oil companies such as Bharat Petroleum Corp led the rally after India raised the price of heavily subsidised diesel on Thursday to rein in its fiscal deficit. The shares later pared gains.
Lenders such as State Bank of India also rose on expectations the government's fiscal consolidation steps would increase chances of a rate cut from the RBI, which reviews policy next on Monday.
Investors are also looking ahead at August inflation data due later in the day, as well as the government's weekly cabinet meeting, which is expected to discuss opening up the sector to foreign direct investment.
"Fuel price announcements coupled with positive global news flows will provide another boost to markets. This rally should continue in near term," Jagannadham Thunuguntla, Head of research at SMC Investments and Advisors Limited.
The Sensex rose 2.1 percent as of 12.56 p.m. and headed for its eighth consecutive winning session. The Nifty rose 2.2 percent.
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Lenders gained on expectations the fuel price hike would increase the prospect of rate cuts, given Reserve Bank of India officials were seen as wanting the government to shore up its finances before considering easing monetary policy.
State Bank of India rose 4.4 percent, while ICICI Bank rose 4.4 percent.
Shares in software services exporters and metals rose after the Fed launched an aggressive stimulus program, saying it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market.
Tata Steel rose 4 pct, while Hindalco Industries rose 7.2 percent, while Infosys rose 1.9 pct.
Airlines rose on hopes that the sector would benefit from a potential opening up of the sector. SpiceJet extended gains for a third day, up 5 percent.