The data late on Thursday showed annual consumer price inflation rose to 3.28 percent in September from a year earlier, in line with August and countering expectations for a 3.60 percent rate. At the same time, separate data showed industrial output hitting a nine-month high.
Although analysts still expected the Reserve Bank of India to keep rates steady in the months ahead, they said further signs of steady inflation would raise the odds of a rate cut.
Share markets also got a boost after Bharti Airtel Ltd rallied on a deal to buy the Tata conglomerate's consumer mobile business, while Reliance Industries Ltd rallied ahead of its results later in the day.
"We expect the RBI to stay on hold in our base case (75 percent probability), but given the possibility of undershooting on macro forecasts, we also assign a 25 percent probability to a cut," Nomura said in a note.
The broader NSE Nifty was up 0.62 percent at 10,159.60 as of 12.45 pm and was just 19 points away from its all-time high of 10,178.95 hit on September 19. The benchmark BSE Sensex was 0.66 percent higher at 32,394.47.
The benchmark 10-year bond yield fell 2 basis points to 6.73 percent on Friday, while the rupee strengthened to 64.93 per dollar from its 65.09 close on Thursday on hopes steady inflation would continue to attract foreign investors to Indian markets.
Among individual share moves, Bharti Airtel rose as much as 8.1 percent to its highest since Aug. 29 and was the top percentage gainer on both the indexes, while Tata Teleservices (Maharashtra) Ltd jumped 9.1 percent.
Upbeat second-quarter results pushed shares of Tata Consultancy Services Ltd (TCS) to their highest since June 7. While quarterly profit slid marginally year-on-year, analysts say margin recovery was the key positive.
Meanwhile, Reliance Industries climbed as much as 2.1 percent to a record high ahead of its September-quarter results. Analysts expect higher earnings from the Indian oil-to-telecoms conglomerate's core petrochemical business, while gross refining margins are expected to remain largely flat.