The decline in prices provided space for the Reserve Bank to cut interest rates in next month's policy review to revive economic growth.
Retail inflation in June touched its lowest at 7.31 per cent since January 2012 and the wholesale Price Index slid to four-month low of 5.43 per cent mainly on easing of vegetables prices.
The apex bank eased financing norms for infrastructure development and affordable housing, exempting long-term bonds from mandatory regulatory norms like CRR and SLR if the money raised is used for funding of such projects, which boosted the shares from interest rates related segments.
Metal and mining counters too were in demand after a report showed that China's economy expanded in second quarter.
Revival of monsoon amid growth in merchandise exports in June 2014 and fall in global crude oil prices also kept the market tempo upbeat.
Country's exports grew by 10.22 per cent in June this year while imports rose by 8.33 per cent.
The Sensex open higher at 25,093.16 and hovered in a wide range of 24,892.00 and 25,713.40 before settling the week at 25,641.56, disclosing a sharp gain of 617.21 points or 2.47 per cent.
The CNX 50-share Nifty also rose by 204.30 points or 2.74 per cent to end at 7,663.90.
However, the market has been slightly affected on concerns over geopolitical tension after news that Malaysian Airlines jet downed at the Ukraine-Russia border.
Quarterly results, especially from IT majors, were above estimates and improved sentiments," said Dipen Shah, Head- Private Client Group Research, Kotak Securities.
Meanwhile, foreign portfolio investors (FPIs) bought shares worth a net Rs 2,527.76 crore during the week as per SEBI's data including the provisional figure of July 18.
Major gainers from the Sensex pack were Tata Steel (12.19 pct), Hindalco (10.87 pct), Axis Bank (9.91 pct), ICICI Bank (8.97 pct), Larsen (7.09 pct), Tata Motors (6.67 pct), BHEL (6.51 pct), SBI (5.78 pct), Tata Power (3.83 pct), ONGC (3.65 pct), Coal India (3.56 pct), Hero MotoCorp (3.03 pct), HDFC Bank (2.50 pct), TCS (1.86 pct), SSLT (1.62 pct) and RIL (1.00 pct).
However, HUL 2.95 pct, Bajaj Auto 2.28 pct, Dr Reddy's Lab 2.24 pct, Infosys 2.18 pct and Gail India 2.02 pct.
Among the S&P BSE sectoral indices, CG rose by 6.62 pct followed by Metal 6.54 pct, Bankex 6.44 pct, Power 4.61 pct, Realty 3.95 pct, Auto 3.69 pct, PSU 3.61 pct, CD 1.89 pct and Oil&Gas 1.71 pct.
The small-cap and mid-cap indices of BSE also firmed up by 5.09 pct and 4.25 pct on good demand from retail investors and outperformed the benchmark Sensex.
The total turnover on the BSE and NSE fell to Rs 16,239.75 crore and Rs 78,781.31 crore, respectively from the last weekend's level of Rs 21,240.48 crore and Rs 1,05,761.67 crore.
Forex: The Indian rupee depreciated further by 35 paise to close at one-month low of 60.28 against the greenback on sustained dollar demand from importers, despite smart recovery in local equities and sustained capital inflows.
At the Interbank Foreign Exchange market, the domestic unit commenced slightly lower at 59.95 a dollar from last weekend's close of 59.93 and immediately touched a high of 59.90.
Later, it continued to rule under pressure and fell to a low of 60.46 before recovering some ground to settle the week at 60.28, still showing a fall of 35 paise or 0.58 pct. Last week, it has dipped by 21 paise or 0.35 pct.
The benchmark S&P BSE Sensex this week spurted by 617.21 points, or 2.47 pct; while FIIs infused USD 321.49 million in the first four days of the week, as per Sebi data.
Pramit Brahmbhatt, Veracity Group CEO, said, "Rupee continued to trade on a weaker side and posted its second weekly loss in a row. On last trading day, the rupee posted its lowest in one month, as early morning Malaysian airlines jet got hit by missile on the Ukraine-Russia border which shocked the whole world and dented the confidence of investors."
"For the week Rupee depreciated by half per cent and closed on a weak note. The rupee is expected to gain in coming weeks if the local equity continues to trade positively. The trading range for the Spot rupee is expected to be within 59.80 to 60.80," he added.
Forward dollar premiums remained weak on sustained receipts by exporters.
The benchmark six-month forward dollar premium payable in December declined further to 225.5-227.5 paise from previous weekend's close of 233.5-235.5 paise and far-forward contracts maturing in June 2015 also softened to 469.5-471.5 paise from 472-474 paise.
The RBI fixed the reference rate for the USD at 60.33 and the euro at 81.5848 from 60.1855 and 81.8720 previously.
The rupee continued its downslide the pound Sterling to end the week at 103.03 from 102.65 preceding weekend and also dipped to 59.49 per 100 Japanese yen from 59.20.
However, it remained stable against the euro to settle at its last weekend's closing level of 81.55.