Equities rose 3.7 per cent on Thursday to their highest close in five weeks, after inflation dropped to a nine-month low and the government unveiled a bigger spending plan to stimulate the economy.

Financial stocks such as State Bank of India and ICICI Bank led the surge as inflation, which fell to below 7 per cent, boosted prospects for deeper interest rate cuts in coming weeks, analysts said.

"I think the RBI will go for aggressive moves. I expect a rate cut either this month or early January," said D.K. Joshi, principal economist at rating agency CRISIL, referring to the Reserve Bank of India.

Construction and engineering companies were also in demand after the government said it was seeking extra spending of about $9 billion for the current year to March as part of a stimulus to lift economic growth and offset the impact of the global slowdown.

Larsen & Toubro, India's leading engineering and construction firm, firmed 3.5 per cent to 811 rupees, while Bharat Heavy Electricals gained 6.9 per cent to 1,432.55. Top listed developer DLF rose 9.6 per cent to 277.40 rupees.

"There has mainly been buying from foreign funds and some rollover of short positions as derivatives expiry is only three sessions away," said R K Gupta, managing director at Taurus Mutual Fund.

The 30-share BSE index rose 361.14 points to 10,076.43, its best close since Nov. 10. It had seesawed in the morning falling nearly 1 per cent as energy firms fell with oil treading water at near four-year lows.

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