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The BSE Sensex gained 409 points, or 1.48 per cent, to end at 28,114. This is its biggest gain in around 30 sessions. The National Stock Exchange's broader Nifty index closed at 8,532.
Market experts said that the momentum started building up during the first hour of the trading day after the government announced its intent to pump in about Rs 12,000 crore this fiscal by way of capital infusion into state-owned banks. This also led to short-covering as traders moved to shore up shares as stocks started to gain.
The State Bank of India led the surge amongst the Sensex stocks, up 5.25 per cent to close at Rs.270.4. ICICI Bank also saw gains of 3.97 per cent to close at Rs.302.5. It had declared results which showed profits up 12.08 per cent over the previous year. The two together contributed to over a quarter of the rally of over 400 points on the Sensex.
"Capitalisation of public sector banks would help put them in a better position for any additional fund-raising they may want to do from the market. Also it would help with any non-performing assets that they might have," said Vaibhav Sanghavi, managing director, Ambit Investment Advisors.
Union Bank of India was up 8.06 per cent. It was the biggest bank gainer on Friday. Then S&P BSE Bankex was up 1.68 per cent.
"Post yesterday's expiry session, some additional buying would have come in the market. This was mainly because of the positive outcome from the US Fed meet, expectations from the RBI policy meet next week and the mild improvement in corporate earnings," said Rikesh Parikh, vice president (equities), Motilal Oswal Financial Services.
"Besides, the Nifty was also trading above its 200 day moving average and that led to some short-covering as well," he said.
Analysts said that markets were also hopeful of a more dovish tone being adopted by the Reserve Bank of India (RBI) during its policy review meet on Aug 4. While a rate-cut announcement has been panned by the market, market-men expect the RBI to temper down its inflation-led concerns.
The revival of the monsoon despite forecasts of a weak season could compel the RBI to soften its stance, they said.
"The RBI's statements will be keenly watched during the policy meet, especially its comments for the coming quarters. The continued revival in the monsoon has also made for a case for a dovish stance," said Dipen Shah, head of PCG (private client group) research, Kotak Securities.
However, not all in the market are convinced that the optimism would last.
"This market will continue to be range-bound, just like it has been for the past seven months. What we saw today was a short-covering rally and we don't expect to see such a bounce-back again in the short-term," said Siddharth Bhamre, head of derivatives, Angel Broking.
Nifty is expected to trade with an upside resistance of 8,750-8,800 and a downside support of 8,150-8,200.
On Friday, the foreign portfolio investors (FPIs) were net-sellers of equities at Rs 277 crore as per provisional data from the exchanges. On the other hand, domestic institutional investors were net-buyers at Rs 1,021 crore.
On the BSE, two stocks advanced for every stock that declined on Friday.
