The 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE) climbed 6.07 percent or 1,019.16 points, the biggest weekly rally in over two months.
The Sensex closed 2.98 percent higher at 17,804.8 points Friday, the last trading day of the week.
At the National Stock Exchange, the 50-scrip S&P CNX Nifty also climbed over 6 percent in the weekly trade. The 50-scrip index soared 3.05 percent to close at 5,360.7 points Friday.
Expectations of end to the monetary tightening cycle boosted investors' sentiments on the Dalal Street this week. The Reserve Bank of India in its second quarter review of the monetary policy said it would not hike rates further if inflation started coming down from December as it expected.
The RBI has hiked key policy rates 13 times since the beginning of 2010 to curb inflation. The aggressive monetary tightening has made cost of capital expensive, hurting industrial growth and companies' earnings and profitability.
There was a strong rally in the interest rate sensitive realty and banking stocks towards the end of the week. The BSE realty index surged 5.34 percent and the banking index jumped 3.73 percent.
ICICI Bank, the country's second largest lender, jumped over seven percent to Rs.932.95 Friday. The largest lender, State Bank of India rose 2.15 percent to Rs.1,907.
Other prominent Sensex gainers Friday included Hindalco, up 10.88 percent at Rs.142.20; Sterlite, up 8.8 percent at Rs.132.90; ICICI Bank, up 7.01 percent at Rs.932.95; and Tata Steel, up 6.45 percent at Rs.480.60.
There were only three losers on the benchmark Sensex: Maruti Suzuki, down 1.99 percent at Rs.1,128; Bharti Airtel, down 0.25 percent at Rs.391.85; and Bajaj Auto, down 0.11 percent at Rs.1,754.45.
The Indian stock markets rallied Friday after two days of holiday. The markets were closed Wednesday, except for an hour-long muhurat trading session, and Thursday on account of Diwali holidays.
Markets rallied across the world towards the end of this week after the European leaders agreed on a plan to solve the debt crisis in the region.
The Japanese Nikkei Friday closed 1.39 percent higher at 9,050.47 points, while Hong Kong's Hang Seng ended 1.68 percent up at 20,019.24 points.
The Chinese Shanghai composite index ended 1.55 percent higher at 2,473.41 points.
European markets registered good weekly gains, however closed marginally in the red Friday. Britain's FTSE 100 closed 0.20 percent down at 5,702.24 points, the French CAC 40 closed 0.59 percent down at 3,348.63 points Friday.
However, the German DAX settled 0.13 percent higher at 6,346.19 points on the last trading day of the week.