India Takes A Free-Market Turn

Indian stocks rallied on Wednesday, after the Congress Party-led government won a crucial vote of confidence in the lower house of Parliament.

The market is counting on the government, newly unencumbered by leftist coalition partners, bringing in a stream of reforms to the financial sector and pressing ahead with a nuclear-energy deal with the United States that should help relieve the country's energy shortage.

The Bombay Stock Exchange's Sensex Index soared on Wednesday, to close up 5.9%, at 14,942.28, after the government of Manmohan Singh won the vote late on Tuesday. The news also gave strength to the rupee, with a dollar falling to 42.1600 rupees late on Wednesday from 42.6076 rupees in late Tuesday trade in New York. In late New York trading WisdomTree India Earnings Fund (nyse: EPI - news - people ), an exchange-traded fund that invests in Indian shares, was up 4.1%, or 81 cents, to $20.76.

The vote came at the end of two days of heated debate and was marred by allegations of the bribery, but Congress and its allies won by a larger margin than had been expected, giving it a mandate to proceed with reforms advocated by the finance minister, Palaniappan Chidambaram. In December, Chidambaram promised to remove a cap that restricts foreign voting rights in a company to 10.0% and vowed to raise the limit for foreign direct investment in the insurance sector to 49.0% from 26.0%. However, owing to differences with Congress's Communist coalition partners at the time, there was little hope that the reforms would actually go through. Now the Communist parties are no longer part of the government, having withdrawn support and triggered the confidence vote.

"Now that the government has proven its majority it could press ahead with the reforms," said Kumar Nathani, fund manager of Taurus Mutual Fund in Mumbai.

Financials were the top performers on the stock exchanges Wednesday, with ICICI Bank (nyse: IBN - news - people ) closing up 11.6%. Engineering and energy stocks were also up, including power equipment maker Bharat Heavy Electricals, which ended the day up 10.9%, on hopes that the government will be able to press ahead with a nuclear energy deal struck with the United States, which the Communist parties had opposed.

Singh has contended that the nuclear-power deal is crucial if India wants to increase economic growth and reduce poverty, but for years had been unable to gain access to the Nuclear Suppliers Group, which controls the export of supplies for nuclear energy production because it hadn't signed up to the Nuclear Non-Proliferation Agreement. Now, India has reached an agreement with the United States, which would give it access to the group if it gets the go-ahead from the International Atomic Energy Agency and the approval of Congress.

While the nuclear deal is likely to go ahead, market observers noted that there were no guarantees that reforms would take place. According to Dharmakirti Joshi, chief economist at Crisil in Mumbai, the government's first priority is likely to be tackling double-digit inflation, in preparation for the general election that must be held by next April or May, at the latest. (See "No Sign Of Change In India" )

The Sensex has been underperforming European and the American markets, falling 26.9% since the start of the year, against the 15.2% drop in Britain's FTSE 100, as foreign investors pulled out more than $4.0 billion, draining liquidity from the market.. The unstable political environment had dashed hopes of any major reforms, including privatization and opening up the retail sector to foreign investors. Meanwhile, the Reserve Bank of India is expected to remain hawkish since inflation shows little sign of dampening.