Mumbai: Shares logged their biggest weekly gain in nearly two months on Friday, bolstered by gains in financials as hopes of an end to the monetary policy tightening cycle in Asia’s third-largest economy drew investors back into beaten down stocks.

Shares in ICICI Bank, the country’s No. 2 lender, led the gains, rising 7.1% to Rs933.35 ($18.85), as hopes of a pause in interest rate hikes boosted credit growth outlook. Still, the stock is down 18.5% so far this year.

The bank is also expected to report nearly 16% rise in its fiscal second-quarter profit on Monday.

The main 30-share BSE index ended up 2.98% at 17,804.80 points, after having risen as much as 3.6% in early deals to its highest level since 4 August, with all but three of the index components closing in the positive territory.

The benchmark, which is down 13.2% in 2011, surged 6.1% in this holiday truncated week -- its best weekly percentage gain since the week ended 2 September. The market was closed on Thursday after a brief special session on Wednesday.

“Interest rate hikes were a big overhang on the market and the investors were concerned about its impact on the corporate profitability," said Dipen Shah, head of research for private client group at Kotak Securities.

“The fact that the central bank has said there could be a pause now has come as a big relief to the market," he said.

The Reserve Bank of India (RBI) raised interest rates on Tuesday for the 13th and possibly final time in a tightening cycle that began in early 2010, on expectations that persistently high inflation will finally begin to ease starting in December.

However, its governor said on Wednesday that the RBI will only consider easing monetary policy if inflation falls below 7%.

Indian shares have been battered this year as surging inflation and interest rates dimmed the growth outlook for the economy and corporate earnings. The global economic uncertainty has also pushed investors away from risky assets.

Shares in other financials such as top lender State Bank of India rose 2.3% to Rs1,909.80, No. 3 lender HDFC Bank gained 2.3% and top mortgage lender Housing Development Finance Corp surged 3.2%.

Citigroup said on Tuesday it did not expect retail deposit rates or lending rates to be increased in the near term and that Indian banks would likely absorb the impact of the latest interest rate increase on their net interest margins.

Some analysts sounded caution on the sustainability of the stock market rally, citing lingering worries about the health of the global as well as the domestic economy.

“It’s too early to say whether things will be all rosy from now on as there are still some concerns on the global macro as well as domestic fronts," said Kaushik Dani, a fund manager with Peerless Mutual Fund.

Morgan Stanley said in a report earlier this week domestic demand drivers such as private consumption, government spending and investment were all moderating, and export growth will also decelerate significantly as developed world growth weakens.

“We are thus increasingly concerned about the potential duration of the growth slowdown cycle," it said.

Infosys ended up 1% at Rs2,858.65, after rising 4.7% during trade to its highest level in more than three months, after the plan to resolve the European debt crisis boosted the business outlook in its No. 2 market.

Also, Infosys co-chairman said in Shanghai the country’s No. 2 software services exporter was looking for acquisitions worth up to $700 million.

Infosys’ bigger rival Tata Consultancy Services gained 2.3% to Rs1,121.50 and No. 3 Wipro closed 5.4% higher at Rs374.05. Both the firms also count Europe as their second biggest export market.

Energy major Reliance Industries, which has the heaviest weightage in the BSE index, rose 3% to Rs900 on institutional buying, dealers said. The stock is down just under 15% this year.

Drugmaker Dr Reddy’s Labs rose 4.9% to Rs1,671.20 after it posted a forecast-beating quarterly profit as robust sales growth in the US offset a sluggish domestic business and higher operational costs.

The 50-share NSE index ended 3.1% higher at 5,360.70 points. In the broader market, around twice as many stocks gained as lost value on total volume of more than 728 million shares.

Stocks that moved

• Top carmaker Maruti Suzuki fell 2% to Rs1,126 after dropping as much as 3.3%. The firm, hit by slowing demand and labour unrest, is expected to report a 32% fall in quarterly profit on Saturday.

• Wind turbine maker Suzlon rose as much as 5.5% after the company announced the completion of REpower Systems AG “squeeze-out," giving it the full ownership of the German unit.

• Shares in sugar producer EID Parry (India) Ltd closed down 1.7% to Rs221.05 after the company posted a 27% drop in its consolidated second-quarter net profit from a year ago.

• Chemicals maker BASF India rose as much as 3.4% after its board approved a proposal to develop and refine yield enhancing traits in rice on behalf of BASF Plant Science Company Gmbh, Germany.