* Hopes of stable govt spark short covering after 2-day fall
* BSE index climbs to highest close since early October
* Some analysts guarded, await poll results on Saturday
* Reliance, banks lead gains (Updates to close)
MUMBAI, May 12 - Indian shares snapped a two-day fall and rallied 4.1 percent on Tuesday to their highest close in more than seven months as investors began betting the Bharatiya Janata Party (BJP)-led group, which is seen as market friendly, would win national elections.
Traders said the market was boosted by hopes the next government would not need the support of communists, who had stalled reforms when they allied with the ruling Congress party-led coalition for most of its five-year term.
"There is speculation that the election will result in the formation of a stable government that excludes the left," said T.S. Harihar, senior vice president at ICICI Securities.
The BJP-led group, which suffered a shock election defeat in 2004 and was trailing for weeks in the month-long elections, may now be gaining momentum against a fumbling ruling Congress party coalition thanks to some savvy alliance building. [ID:nISL443528]
Exit polls will be announced after the last round of voting ends on Wednesday and the election results are due on Saturday.
The process of coalition formation following the election results could be chaotic, Credit Suisse analyst Nilesh Jasani said in a note. "The only thing predictable in such events is the unpredictability," he said.
The 30-share BSE index <.BSESN> rose 4.07 percent, or 475.04 points, to 12,158.03, its highest close since Oct. 3. All but one of its components advanced, after choppy trading through the first half of the session, with the benchmark falling as much as 0.5 percent at one stage.
Energy giant Reliance Industries
The BSE index, which had fallen more than 3.5 percent in the previous two sessions, has jumped 51 percent since hitting a 2009 low in early March and is up 26 percent this year after slumping 52 percent in 2008.
Analysts said the market would likely see more volatility when exit polls are released.
"Short-term investors will trade on the exit polls. Those with a longer-term view will wait for the actual results to come out," Anand Shah, head of equities at Canara Robeco Mutual Fund, said.
Traders said investors shrugged off weak economic data.
Industrial output fell at its steepest annual pace in at least 14 years in March, leaving the door open for further interest rate cuts by the central bank.
Factory output in March fell 2.3 percent from a year earlier, the third fall in the past four months and much sharper than market expectations of a 0.5 percent decline. [ID:nDEL155586]
Analysts said the economy was still set for recovery from late 2009.
"We still believe the economy is set for a rebound in the second half of the 2009/10 fiscal year due to fundamental reasons such as fiscal stimulus packages, monetary actions, extra oil and gas output later this year and falling commodity prices and robust domestic demand, " said Robert Prior-Wandesforde, Senior Asian Economist at HSBC in Singapore.
Reliance Industries, which has the biggest weight in the main index, rose 5.3 percent to 1,958.30 rupees, its best close in almost 7-½ months.
Private-sector lender ICICI Bank gained 6.7 percent to 558.65 rupees, while rival HDFC Bank climbed 3.9 percent to 1,189.70 rupees. Government-run State Bank of India advanced 2.8 percent to 1,295.45 rupees.
No. 2 outsourcer Infosys rose 5.5 percent to 1,597.95 rupees. In the broader section, gainers led losers 1,410 to 1,106 on relatively moderate volume of 423 million shares.
The 50-share NSE index <.NSEI> rose 3.6 percent to 3,681.10.
MAIN TOP 3 BY VOLUME
* Unitech
* Suzlon Energy
* HDIL
STOCKS THAT MOVED
* Motilal Oswal Financial Services Ltd
* United Breweries
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