By Krittivas Mukherjee and Bappa Majumdar

NEW DELHI (Reuters) - India's Congress-led coalition is eying possible new allies after its general election victory, with the Indian stock market expected to surge on Monday on hopes of a strong and stable government.

Prime Minister Manmohan Singh's coalition defied predictions of a tight election and was only about 11 seats short of an majority from the 543 seats at stake, according to election commission data, though the final count see tiny changes.

In a country where unwieldy coalitions were becoming the order of the day and hobbling policy, the electoral verdict this time means Congress will call the shots in coalition building rather than being dependent on the goodwill of regional parties.

Congress' alliance took 261 seats, sweeping aside its nearest rival, the bloc led by the Hindu-nationalist Bharatiya Janata Party (BJP), which won only 159 combined.

A strong Congress-led coalition, free of pressures from its former communist partners, has boosted the prospect of reforms to encourage growth in Asia's third largest economy. Indian markets were expected to welcome the outcome on Monday.

The rupee was expected to strengthen past 49 per dollar and bond yields were set to fall as the outcome should encourage foreign investors, analysts said.

"The markets could go up anywhere between 1,100-1,300 points over the next two to three days because you cannot have asked for a better combination," Arun Kejriwal, strategist at KRIS, said of the share market.

Congress, which alone won 205 seats, needs a handful of partners to reach the 272 seats needed to take power, and is expected to seeks the support of more smaller parties or independents.


Congress leaders will meet on Tuesday to officially endorse Manmohan Singh as prime minister, after which the party will meet its coalition partners to decide potential new allies.

The government will also have a strong mandate to deal with security issues in a region overshadowed by instability in Pakistan and Afghanistan.

"(Manmohan Singh) said that the new government will be assuming office in the backdrop of a deep global economic recession and serious troubles in India's immediate neighbourhood," Congress spokesman Janardhan Dwivedi said.

"He was confident that the clear mandate received by the Congress-led UPA alliance would have enabled the new government to respond to these two immediate challenges effectively."

(Writing by Matthias Williams; Editing by Ralph Boulton)

Article Published: 17/05/2009