After dropping over 160 points, the Sensex staged a remarkable recovery on Friday to close 70 points higher at 16,718.87 - its fifth straight day of gains - and clocked the best weekly gains this year.
Market players said investors continued to bet on rate cut by RBI, helping markets shrug off weak global cues.
After opening lower, the BSE benchmark Sensex touched the day's low of 16,485.02 points as US Federal Reserve chief yesterday dashed hopes of a fresh stimulus package while Fitch downgraded long-term credit rating of Spain, adding to Eurozone worries.
Trends from Asian markets and European markets were also weak with indices down by up to 2 per cent.
After moving in tandem with global trends, Sensex started recovering in the last two hours of trade after RBI Deputy Governor K C Chakrabarty said: "If inflation comes down, definitely monetary policy rate will come down".
Brokers attributed the recovery to a rise in stocks of capital goods, realty and fast moving consumer goods.
The 30-share index finally closed 69.82 points higher at 16,718.87, a fresh one-month high. The index also logged best weekly gains of 2012 by rising 753 points or 4.72 per cent.
In the 30-share index, 21 stocks closed higher led by gains in Sterlite, Gail and L&T. Heavyweights like ITC and Reliance that rose over 1 per cent supported the rise.
The 50-share NSE Nifty also rose by 18.70 points to close at 5,068.35, after slipping below the key 5,000-level.
"In the short term, the RBI rate decision will be keenly watched. The April IIP as well as the May Inflation data to be released next week may have a bearing on the policy," said Dipen Shah, Head Fundamental Research, Kotak Securities.