Indian Shares Bounce Back

Sonia Gandhi's decision not to accept the prime minister role calms market fears, at least for one day.
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Updated from 1:05 p.m. EDT

The Indian stock market, and shares of India-based outsourcing companies bounced back strongly Tuesday, as the world's second-most populous nation absorbed the news that Congress Party leader Sonia Gandhi has decided not to accept her adopted country's premiership.

Mrs. Gandhi, who would have been the fourth member of her family to lead India, rejected the post in the face of furious objections by nationalists who said they could not accept a foreign-born prime minister. The Italian-born Gandhi is the widow of former Prime Minister Rajiv Gandhi, and the daughter-in-law of former Prime Minister Indira Gandhi, both slain by assassins. She is also the granddaughter-in-law of India's first Prime Minister, Jawaharlal Nehru.

The apparent retreat by Mrs. Gandhi helped the Indian markets to stabilize after falling sharply Friday in the wake of the election results and then suffering their worst one-day drop in history on Monday. The benchmark Sensex stock index gained 8% Tuesday.

In recent trading in the U.S.,

Wipro

(WIT) - Get Report

was up $3.43, or 9%, to $41.03;

Infosys Technologies

(INFY) - Get Report

was up $5.03, or 6.9%, to $77.50; and

Satyam Computer Services

(SAY)

was up $1.48, or 8.8%, to $18.26.

Despite the rebound, the political situation in India is still in flux.

At the financial heart of the matter, the markets are worried that the victorious Congress party, under pressure from its Communist allies, will reverse at least some of the economic reforms that have transformed the economy.

But Mrs. Gandhi's withdrawal opens the way for Manmohan Singh, minister of finance in the early 1990s when Congress introduced many key economics reforms, to lead the coalition government. Singh, unlike Mrs. Gandhi, has the virtue of being a non-polarizing figure and is unlikely to reverse India's economic progress, said analyst Ashish Thadhani of Brean Murray.

Thadhini also noted that the Communist-led government of West Bengal, which includes Calcutta, has been a strong supporter of policies friendly to that state's information technology companies.

Earlier this week, the Left Front, which includes several parties calling themselves Communist, announced that it will support, but not join, a new government led by the Congress Party. On the one hand, that removes from the government an element that frightens the markets. On the other hand, it makes the coalition, which does not have a clear majority in parliament, somewhat less stable.

The major leftist parties have said they would seek to block the privatization of state-owned companies and would oppose proposals to allow more foreign investment in India's insurance, banking and retail sectors.

However, it's still too early to know exactly what economic policies the new government will pursue, and until that is clearer, the markets may remain volatile. "It all depends on whether there is a clear economic policy spelled out by the government and endorsed by the left in the next few days," Sanjay Prakeash, chief executive of HSBD Asset Management told

The New York Times

.