The BSE Sensex rose 0.99 percent, while the broader NSE Nifty ended higher 1.12 percent, retracing from their lowest closing levels in more than a month made on Wednesday.
Tata Steel shares surged 4.8 percent after the company's second-quarter profit beat expectations, helped by a rise in prices and market share at home.
Indian shares snap 7-day losing streak, RBI policy, state elections in focus
(Reuters) Indian shares rose 1 percent on Thursday, snapping a seven-session losing streak as lenders rallied after the central bank governor announced bond purchases, easing some concerns about losses in the sector tied to their heavy debt holdings.
Shares also tracked a regional rally after U.S. Federal Reserve Chairman nominee Janet Yellen said the Fed has "more work to do" to help the U.S. economy, spurring hopes she would opt to delay tapering of monetary stimulus if her confirmation is approved by the U.S. Congress.
With reporting of July-September earnings results largely over, traders said the focus will be on a series of state polls this month ahead of general elections next year, and the Reserve Bank of India's policy review next month.
Data on Thursday showed India's headline inflation accelerated to an eight-month high of 7.0 percent in October, raising the prospect of a fresh rate hike despite the central bank governor's soothing words on Wednesday on core retail inflation.
"Post a strong quarter of earnings and comments from the Fed Chief nominee, indicating a delay in any tapering of QE, markets did rallied," said Rajat Rajgarhia, director of research at Motilal Oswal Financial Services Ltd.
"However, near-term trends will still remain range bound, till the time we see clarity on any growth revival in 1QCY14 or election results in 2QCY14," said Rajgarhia.
The benchmark BSE index rose 1.02 percent, or 205.02 points, to end at 20,399.42, snapping a seven-day losing streak ever since hitting a record high early this month.
The index fell 1.3 percent for the week. Markets are closed on Friday for a local holiday.
The broader NSE index rose 1.11 percent, or 66.55 points, to end at 6,056.15, and fell 1.4 percent for the week.
Banking stocks rallied after RBI governor Raghuram Rajan said the central bank would buy bonds worth 80 billion rupees ($1.26 billion) via open market operations (OMO) on Nov. 18.
That sparked a rally in bonds, reducing some of the concerns that banks would sustain losses from their debt portfolios.
Among private sector lenders, ICICI Bank Ltd surged 3.7 percent, while HDFC Bank Ltd rose 1.3 percent.
In state-owned banks, State Bank of India and Canara Bank Ltd rose 1.5 percent each, while Bank of India Ltd jumped 5.2 percent.
Tata Motors Ltd shares surged 5.7 percent after its unit Jaguar Land Rover Ltd reported global wholesales of 36,157 vehicles in October, beating some analysts' estimates.
Tata Steel Ltd jumped 4.9 percent after the company's second-quarter profit beat expectations, helped by a rise in prices and market share at home.
Reliance Communications Ltd gained 2.9 percent adding to previous day's 2.4 percent rise after the company reported better-than-expected September-quarter earnings on Tuesday.
Natco Pharma Ltd surged 4.1 percent after prospects for its generic version for Teva Pharmaceutical Industries' billion dollar drug got a boost from a favourable U.S. court ruling on Wednesday.
However among stocks that fell, Cipla Ltd declined 2.3 percent after the company's July-September net profit fell by 27 percent.