The S&P BSE Sensex extended its gains on Friday, rising 255 points after the US central bank decided not to hike interest rate and increasing expectations of a rate cut by the Reserve Bank of India (RBI).

The Sensex closed at 26,218 points while the 50-share Nifty rose 82 points, or 1.05%, to end at 7,981 points.

"Technically Nifty Future is in short term correction phase and is likely to trade in broad range of 8150 and 7650, it has immediate support at 7950 with the breach of this it may correct further till the next support of 7800, while with the crossing of the resistance of 8075 it may test the level of 8150," said Vivek Gupta, CMT -Director Research, CapitalVia Global Research Limited.

"Market may remain volatile ahead of expiry of derivative contracts on 24th September. RBI's monetary policy review is scheduled on 29th September which will pave the way for market movement in near term," he added.

On Thursday, the US Federal Reserve kept key rates unchanged, while the markets widely expected that it would begin tightening of monetary policy. The central bank cited global economic and financial developments as a major reason behind its status quo decision.

"The central bank would have to hike during its scheduled October or December meeting to achieve its estimate. Emerging markets might heave a sigh of relief, as Fed's dovish language implies that the threat of capital outflows has mitigated," said Amar Ambani, Head of Research, IIFL.

Besides, the rally in the stock markets was also supported by growing expectations of a rate cut by the RBI at its bi-monthly meeting on 29 September, given falling inflation rates. The wholesale price index (WPI) fell to -4.95% in August, recording a tenth consecutive monthly decline.

"Dovish Fed policy stance and moderating India's inflationary scenario provide much needed leeway to the RBI to act on the rates. There is a strong perception that a rate cut of 25-50 bps is in the offing at the upcoming monetary review at the end of the month," said Ambani.

Among the sectoral indices, realty, banking and PSU were the top gainers, while FMCG, consumer durables and capital goods ended in the red. Axis Bank, ONGC, M&M, Lupin, RIL and SBI were the top gainers among the Sensex components.

The stock price of SKS Microfinance plunged over 15% after it failed to obtain a licence from the RBI to start small bank services. On Wednesday, the RBI approved small finance bank licences to 10 entities, with eight of them belonging to the microfinance sector.

In the bullion market, gold prices ended flat at Rs 26,600 per 10 grams despite weakness in the metal prices in international markets. Silver prices extended gains for the second straight session, rising by Rs100 to Rs 35,800 per kg.

On the other hand, the rupee posted its biggest single-day gain in two years, reaching its highest level since 20 August. It closed at 65.68 against the dollar.