Jan 2 (Reuters) - India's benchmark Nifty 50 hit a record high of 26,331.40 on Friday, rising as much as 0.71% in a broad-based rally as upbeat corporate updates lifted earnings expectations and sentiment.

The Nifty 50 index rose as much as 0.71%, while the BSE Sensex index added 0.66% to 85,751, as of 3:17 p.m. IST.     

"We expect earnings to beat, the Reserve Bank of India to keep its foot on deregulation, more reforms from the government and a potential trade deal with the U.S. in this quarter," said Ridham Desai and Nayant Parekh, equity strategists at Morgan Stanley India in a note on Friday.

After the underperformance over emerging market peers in 2025, relative valuations have corrected meaningfully while most importantly India is set for a positive growth surprise in the coming months, Morgan Stanley analysts said.

The blue-chip indexes had touched record levels in November but retreated last month amid foreign outflows. Recent positive corporate updates have revived expectations of strong December-quarter earnings, analysts said.

Fifteen of the 16 major sectors advanced.  High-weight bank stocks led gains, with the bank index rising 0.7%. Private lenders gained 0.5%, while public sector banks climbed 1.2%, all scaling fresh peaks.

The auto index advanced 1.2%, led by Hero MotoCorp, which was up 1.6%, and TVS Motor, which advanced 1.5% on robust December sales. 

ITC, maker of Gold Flake and the market leader, extended losses as brokerages projected an earnings hit from the cigarette tax hike. The stock, down 4%, dragged the fast-moving consumer goods index 1.2% lower.

The metals index rose 1.4%, tracking an uptick in global metal prices on a weaker U.S. dollar and top consumer China reporting stronger industrial activity. [MET/L]

The announcement of import tariffs on some steel products by the Indian government to curb China's imports and protect domestic industry also aided the sentiment.    

The broader small-caps and mid-caps rose about 0.7% and 1%, respectively.        

(Reporting by Vivek Kumar M and Bharath Rajeswaran; Editing by Rashmi Aich and Nivedita Bhattacharjee)

By Bharath Rajeswaran and Vivek Kumar M