Mumbai: The BSE Sensex and Nifty gained more than 1 per cent on Friday, hitting their highest level in three weeks as banking stocks surged on expectations from an industry meet underway, while a survey showing manufacturing activity expanded at its fastest pace in two years in December also boosted sentiment.

Banking stocks advanced on hopes of faster reforms in the sector ahead of a two-day industry meet that started on Friday. The Bank Nifty rose nearly 2 percent to a record high of 19,118.85, surpassing the previous peak of 18,923.60 hit on December 23. The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, rose to 54.5 in December from 53.3 in the previous month, its highest since end-2012, as new orders flooded in and factories kept price increases to a minimum.

The benchmark BSE Sensex closed up 1.38 percent at 27,887.90. It gained 2.4 per cent in the week. The broader Nifty ended 1.35 percent higher at 8,395.45, and added 2.4 per cent in the week.

Heavyweight banks led the rally on Friday. State Bank of India gained 0.4 per cent, ICICI Bank added 2.8 per cent, and HDFC Bank rose 1.4 per cent.