MUMBAI (Reuters) - The Nifty rose about 2 percent, heading towards its biggest single-day gain in seven months as the rupee recovered from a 23-month low, while hopes that the central bank might cut rates in its September meeting also helped.
After being relatively stable this year the rupee along with other Asian currencies have been jolted by Beijing's unexpected move this week to devalue its currency.
Lower consumer and wholesale prices have bolstered a case for the Reserve Bank of India to cut rates, according to traders.
"The RBI will have to intervene because if the rupee slips faster it will create larger problems on the import bill side," Deven Choksey, managing director of KR Choksey Securities said.
"The rupee is unlikely to depreciate beyond 65.5 at this point of time," Choksey said.
The Sensex gained 1.75 percent, while the Nifty rose 1.91 percent, heading towards its biggest single-day percentage gain since January 2015.
Stocks also got a lift on hopes of a special session of parliament to pass a key national goods and service tax reform and from changes made in the MSCI's quarterly index review. UK, France and India are expected to experience the largest positive flows according to HSBC.
Rate-sensitive stocks booked the biggest gains, with Housing Development Finance Corp gaining 2.7 percent, ICICI Bank rising 2.6 percent and HDFC Bank adding 1.9 percent.
Index heavyweight Reliance Industries gained 3.5 percent.
Sun Pharmaceutical Industries rose 3.8 percent, heading for a fourth day of gains on hope a key paralysis drug will boost sales.
Adani Port and Special Economic Zone gained 8.3 pct adding to Thursday's 3.9 pct rise as it replaces NMDC in the Nifty effective Sept. 28.
(Reporting by Karen Rebelo; Editing by Anand Basu)