The BSE Sensex rose to its highest weekly close in five weeks on Friday, on hopes renewed policy reforms by the government and easing inflation will give a much needed boost to the country's slowing economy.

Analysts said that a decline in inflation could give the RBI much-needed headroom to unwind its tight monetary policy and boost corporate investment crimped by high interest rates.

Banks were among the gainers with the country's top lender State Bank of India (SBI.NS) and rival ICICI Bank (ICBK.NS) rising 0.66 percent and 1.03 percent respectively, on expectations of an easing interest rate cycle. The banking index rose 0.5 percent.

The main 30-share BSE index ended up 0.73 percent, or 117.11 points, at 16,154.62, with 20 of its components in the green. The benchmark was one of the world's worst performers in 2011, falling almost a quarter.

The 50-share NSE index was up 0.72 percent at 4,866 points.

In the broader market, gainers overwhelmed losers 1,034 to 440 on total volume of about 833.7 million shares.

Coal India (COAL.NS), the world's largest coal miner, rose 5.6 percent after it said it will sign a five-year agreement with its worker unions to increase wages by 25 percent as against 30-40 percent demanded.

This was the stock's highest single day percentage gain since July 27 last year.

Clarity on the wage negotiations and cash usage would remove two key overhangs on the stock, JP Morgan said in a note.

Tata Steel (TISC.NS) rose to its highest in over two months, up 6.9 percent at 415.7 rupees, as buyers chased bargains in bluechips. Tata Motors (TAMO.NS) rose 1.26 percent.

There is a growing consensus that we are going to see a good investment on the policy front by the government. Secondly, one is getting more comfortable with the way macroeconomic indicators have behaved in the last few days, said Gajendra Nagpal, Chief Executive at Unicon Financial Intermediaries.

Earlier this week, India formally eliminated restrictions on foreign investment in its single-brand retail sector, opening the door to the likes of Swedish furniture giant IKEA IKEA.UL to open stores in Asia's third-largest economy.

The government is also drawing up plans to allow foreign airlines to invest in its hard-pressed airline sector.

Montek Singh Ahluwalia, deputy chairman of the Planning Commission, in a recent interview to Reuters, said the government must now send out a credible signal through its budget announcement in mid-March to shore up investors' faith in India's macroeconomic fundamentals.

A better-than-expected growth in industrial output and slowing inflation is expected to give more options to the Reserve Bank of India when it reviews policy on Jan 24.

With food inflation declining for two consecutive weeks, there is a feeling that the case is not far away when you could see the reversal of interest rate cycle, Nagpal said.

Industrial output rebounded in November, expanding 5.9 percent versus a 4.7 percent contraction the month before.

Headline inflation for December probably fell to 7.50 percent, economists polled by Reuters said, helped by a drop in food prices, after remaining above 9 percent for a year. The data is due on Monday.

The Reserve Bank of India has raised interest rates 13 times between early 2010 and last October.

Wind turbine maker Suzlon Energy (SUZL.NS) rose 8.7 percent after the company won a 20.5 megawatt UK order.

Two wheeler makers Hero Motocorp (HROM.NS) and Bajaj Auto (BAJA.NS) fell 1.07 percent and 3 percent after brokerage CLSA cut it's motorcycle industry growth forecast for FY13 from 14 percent to 8 percent.

CLSA has downgraded Hero Motocorp (HROM.NS) to 'sell' from 'under-perform' and has cut its target price to 1,650 rupee from 1,970 rupees. It has also cut Bajaj Auto's (BAJA.NS) target price to 1,430 rupees from 1,625 rupees, while maintaining an 'under-perform' rating.

Tech bellwether Infosys Ltd (INFY.NS) added to Thursday's losses falling as much as 1.4 percent before closing down 0.16 percent at 2,584.20 rupees after the company trimmed its full-year revenue growth outlook for a second straight time and warned of lower client spending because of the crisis in Europe, its second-biggest market.

Larger rival Tata Consultancy Ltd (TCS.NS), which will report earnings next week, also fell 0.34 percent.

European shares and the single currency rose on Friday after

positive comments on the region's outlook from the European Central Bank and the success of Spain's bond auction, with attention focused on Italy's first debt sale of the year.

STOCKS THAT MOVED

* GVK Power and Infrastructure Ltd (GVKP.NS) rose 5.11 percent after the company said its unit signed a road project with the National Highways Authority of India. The project has a 30-year concession period.

* Diamond Power Infrastructure Ltd (DIAC.NS) rallied more than 7 percent after it said it received an order worth 483 million rupees for supply of power transformers. [ID:nWNAS5738]. The stock closed up 3.51 percent.

* Tyremaker Ceat (CEAT.NS) rose 6.5 percent after it said its board will meet on January 24 to consider and approve allotment of convertible warrants on a preferential basis to its founder and founder companies.

* Drugmaker Ind Swift Ltd (INSW.NS) closed up 3.43 percent after it said it will sell heart attack detection kit developed by Swiss drugmaker Roche Holding (ROG.VX) in India.

* Gas distribution companies Indraprastha Gas Ltd (IGAS.NS), Petronet LNG Ltd (PLNG.NS) and state-run gas utility GAIL (India) Ltd (GAIL.NS) ended down 3-8 percent on a Economic Times report that the government has formally asked the petroleum regulator to determine marketing margins for natural gas on the basis of costs.

MAIN TOP THREE BY VOLUME

* Suzlon Energy on 47.37 million shares

* Lanco Infra (LAIN.NS) on 38.37 million shares

* Jaiprakash Associates (JAIA.NS) on 25.89 million shares